ULIP VS Mutual Funds: Which is More Beneficial?
Mutual Funds and Unit-Linked Insurance Plans (ULIPs) are two appealing investment options for those seeking to accumulate wealth over the long term while enjoying tax advantages. Both financial products attract small-scale investors by offering growth opportunities, but they compete for a significant share of your investment portfolio. While they share similarities, key differences in their objectives, features, returns, and other factors set them apart. As a result, individuals looking to invest in either option must carefully consider their financial goals to make an informed decision.
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)?
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 covers 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.
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.
Difference Between ULIP and Mutual Fund
If you are unsure whether to invest in ULIP vs Mutual Fund, refer to these key differences and make an informed decision:
ULIP VS Mutual Funds - Key Differences |
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Characteristics |
ULIPs |
Mutual Funds |
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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 an investment instrument designed to generate wealth and yield respectable returns over time. |
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Product Type |
ULIPs are insurance products that offer a combination of investment and insurance benefits under a single integrated plan. These plans offer an opportunity for wealth creation and financial cover for policyholders’ families. |
Mutual Funds, on the other hand, are entirely investment-based options. |
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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. |
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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. |
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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. |
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Risk Cover |
ULIPs combine insurance and investment. In case of the policyholders' sudden demise, ULIPs offer financial stability for the family. |
Mutual funds do not offer risk cover like ULIPs. |
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Clarity of Information |
Thanks to recent regulatory changes made by the IRDAI, ULIPs are now very transparent and offer detailed data on fund allocation. |
Fund houses must provide a thorough summary of Mutual Fund investments. Financial markets regulator SEBI also advises fund houses to provide comprehensive data on various schemes. |
Factors to Consider Before Choosing Between ULIP and Mutual Fund
- Decide if your primary objective is to acquire insurance coverage along with investment or solely to optimise return out of investment.
- ULIPs usually have longer commitments due to the minimum lock-in period, whereas Mutual Fund investments can be made and left in shorter to medium-duration investments.
- Analyse how comfortable you are with taking on risk. Incorporating the insurance component in ULIPs might offer more stable returns, but Mutual Funds might expose you more to market volatility and potential returns.
- Consider how soon you might need to use your money. Mutual Funds offer relatively higher liquidity than ULIPs, which often come with longer lock-in periods.
- The degree of available investment options is also essential. Mutual funds usually provide greater choices of funds and strategies that underlie those funds, whereas in many ways, ULIPs would restrict the choices available within their designed scheme.
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Index Funds Vs ETFs |
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2. |
Equity vs Debt Mutual Funds |
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3. |
Multi-Cap Funds Vs Flexi-Cap Funds |
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4. |
Fixed Deposits vs Mutual Funds |
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5. |
Liquid Funds vs FD |
Conclusion
In conclusion, ULIPs are a wise investment choice because they offer built-in insurance protection, tax advantages, loyalty rewards, and simple switching options.
In addition, mutual funds are attractive because they offer better performance, lower costs, more fund options, and no lock-in period. Therefore, deciding between ULIPs and Mutual Funds comes down to knowing how each product fits into your overall investment strategy.