ULIP VS Mutual Funds: The More Beneficial Investment Avenue

30 September 2022
4 min read

Mutual Funds and Unit-Linked Insurance Plans are two joint investments available today. As a result, mutual Funds and Unit Linked Insurance Plans (ULIPs) stand out as two promising options that capture your attention when you search for investment vehicles that can assist you in accumulating wealth over the long term while providing tax advantages.

Additionally, these two financial products frequently compete for a more significant portion of your wallet. Both enable small-scale investors to build wealth over time. However, objectives, features, returns, and several other factors considerably set Mutual Funds and ULIPs apart. Depending on their financial goals, people looking to invest in any of these options must choose.

Here is a thorough comparison of ULIPs and Mutual Funds to assist potential investors in making the right choice.

What Is a Unit Linked Insurance Plan?

ULIP Meaning - Unit Linked Insurance Plans, also known as ULIPs, enable you to combine insurance and investment into one product. A ULIP is a type of insurance that provides coverage for your family's financial security and investment opportunities to help you achieve your long-term objectives.

There are two parts to the premium paid for a ULIP. First, it is split between contributing to your life insurance and investing the remainder in the fund of your choice. Depending on your objectives and level of risk tolerance, you can choose to invest in either equity or debt funds or a mix of the two.

Since its founding in 1971, ULIPs have advanced significantly. The Unit Trust of India (UTI) introduced the first ULIP in 1971, followed by the Life Insurance Corporation (LIC) in 1989.

What Is a Mutual Fund?

Mutual Fund Meaning - A Mutual Fund is an expertly managed investment vehicle funded by investor contributions to make investments on their behalf. These funds are invested in securities by Mutual Funds, including stocks, bonds, money market instruments, etc.

For investors who want to invest in such securities but lack the knowledge or time to do so, Mutual Funds are the ideal option. Professionals manage these funds and strategically allocate the money to benefit the investors' capital gains and income.

Key Difference Between ULIP and Mutual Fund

Suppose you are unsure whether to invest in ULIP vs Mutual Fund. In that case, we will thoroughly analyse both products across various criteria that you should consider when selecting one of them in this blog.

Characteristics

ULIPs

Mutual Funds

Investment Purpose

ULIP plan has the benefit of functioning as a market-based investment in addition to being primarily an insurance product.

A Mutual Fund is a sheer investment instrument with the sole purpose of generating wealth that can yield respectable returns over time.

Product Type

ULIPs are insurance products that offer a combination of investment and insurance benefits under a single integrated plan. These plans provide an opportunity for wealth creation along with financial cover for policyholders’ families.

Mutual Funds, on the other hand, are entirely investment-based options.

Return on Investment

Since ULIPs invest in equity, debt, or a blend of the following, their returns can fluctuate. However, Unit-Linked Insurance Plans can provide low to high returns depending on the asset allocation.

Depending on the scheme chosen, Mutual Fund returns can vary and be low or high. Mutual Fund minimum returns are not guaranteed. Although, on the contrary to ULIPs, Mutual Funds may provide higher returns.

Lock-In Period

Because ULIPs are insurance programs, insurers set a lock-in period for these investments, typically five years. Before this lock-in period expires, investors cannot redeem their investments.

In open-ended Mutual Funds, there is no lock-in period. However, in the case of ELSS, the lock-in period is three years. Close-ended funds also have a lock-in period. However, individuals can subscribe to a close-ended scheme only during the NFO period. You can redeem your units only after a specified timeframe.

Taxation

Individuals can claim tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act on the premiums paid towards a ULIP. In addition, the maturity amount is tax-free under Section 10(10D).

In the case of mutual funds, a tax deduction is available only for investment towards ELSS under Section 80C. Investing in any other type of mutual fund does not come with the benefit of tax deductions.

Risk Cover

ULIPs are a combination of insurance and investment. Further, in case of the sudden demise of the policyholders, ULIPs offer financial stability for the family.

Mutual funds do not offer risk cover like ULIPs.

Clarity of Information

ULIPs are now very transparent, thanks to recent regulatory changes made by the IRDAI, and they now offer detailed data on fund allocation.

Fund houses must provide a thorough summary of the Mutual Fund investments in the case of Mutual Funds. In addition, fund houses are also advised to provide comprehensive data on everything about various schemes by financial markets regulator SEBI.

Conclusion

In conclusion, ULIPs are a wise investment choice because they offer built-in insurance protection, tax advantages, rewards for loyalty, and simple switching options.

In addition, because they offer better performance, lower costs, more fund options, and no lock-in period, Mutual Funds are also attractive. Therefore, deciding between ULIPs and Mutual Funds comes down to knowing how each product fits into your overall investment strategy.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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