When an investor is looking for an investment opportunity to achieve their financial objectives, they can decide where to invest on the basis of the return required, risk profile, & the time for converting cash. Among the multiple options available, Mutual funds & ULIPs are the two most popular investment options that provide financial security in case of emergencies, wealth creation through market-related fluctuations. But some plans also come as a combination of both insurance & investments. In this article, let us take a look at which plan is better for you, ULIP or Mutual Funds.
What Is ULIP?
A ULIP Policy is one of the types of life insurance & it includes two factors: insurance &investment. Unlike term insurance, ULIP offers a part of the premium to be paid towards life insurance &the rest towards investment. One can opt to invest in debt, equity, or both, depending upon the level of risk &your objectives, making it an ideal investment option. It provides a flexible option to switch between the funds anytime during the policy tenure.
In case of the death of a policyholder, the nominees will receive the return on investment or the amount of sum assured, whichever is higher. &, if the policyholder survives the policy, they will receive the fund value.
What are Mutual Funds?
Mutual Funds are considered to be investment pools, where funds are collected from multiple investors & invested in a diversified portfolio of assets. The investors are supposed to share the profits & losses of the whole fund equally. Due to this shared ownership, these funds are known as “Mutual Funds”. They can be either short-term or long-term, based on the type of fund chosen:
- Long-Term Mutual Funds
Examples of a Long-Term Investment Plan under mutual funds are:
- Index Funds
- Hybrid Funds
- Equity Mutual Funds
- Short-Term Mutual Funds
Examples of a Short-Term Investment Plan under mutual funds are:
- Short Duration Debt Funds
- Ultra Short Duration Debt Funds
- Liquid Funds
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Difference between ULIPs & Mutual Funds
Provided are the differences between ULIPs & Mutual Funds:
| Basis of Difference | ULIPs | Mutual Funds |
| Objective of Investment | It offers dual benefits of market-linked investment & insurance coverage. | This investment plan helps generate wealth & earn returns. |
| Type of Investment | A combination of insurance & investment in debt, equity, or balanced funds under one plan | Investment-based plan, no insurance component |
| Regulatory Body | Insurance Regulatory & Development Authority of India (IRDAI) | Security & Exchange Board of India (SEBI) |
| Risks Involved | With the insurance component involved, in the unfortunate event of the policyholder’s sudden demise, the nominees will be entitled to receive the sum assured. | No risk cover is involved. |
| Return on Investment | The risks involved range from low to high, depending on the allocation of funds & the market’s performance. | They may offer higher returns in comparison to ULIPs. |
| Lock-in Period | Five years before which redemption of investments is not allowed. | No lock-in period in case of open-ended schemes, but in case of ELSS, the lock-in period is, however, 3 years. |
| Taxation Benefits | The premium paid towards the plan is eligible for a tax deduction u/s 80C, maximum up to INR 1.5 lakhs. Additionally, the maturity benefits received are also exempt from tax u/s 10(10D). | Amount invested towards ELSS is eligible for a tax deduction u/s 80C. |
Features of ULIP
Provided below are the salient features of ULIP:
- Dual Benefits
ULIP has its dual benefits of insurance with investment, which allows wealth growth &financial security for family members.
- Fund Options
It offers many fund options, such as equity for high growth &debt for stability, which fulfil all types of risk tolerances.
- Life Cover
It provides life coverage to the policyholder’s nominees in case of the sudden demise of the policyholder, hence providing financial support to the family.
- Flexibility
It provides flexibility to adjust between the funds, allowing you to switch your investments as per the market conditions &your risk tolerance level.
- Transparency
The fees &charges are clearly disclosed, which helps in making informed decisions.
- Tax Benefits
Get a tax deduction on the amount of premium paid u/s 80C, &the amount of proceeds to be received on maturity is exempt from tax u/s 10(10D).
- Partial Withdrawal
Get your funds withdrawn partially from your fund value after the lock-in period is completed to meet emergency situations.
Features of a Mutual Fund Account
Provided are the features of a Mutual Fund Account:
- Diversification
It collects funds from different investors & invests in stocks, debts, or assets.
- Professional Management
It takes the help of professional fund managers to manage funds, hence saving time & effort.
- Affordability
Make small investments which make it easily accessible to everyone.
- Liquidity
They are liquid; hence, they can be purchased or sold on any business day.
- Systematic Investment Plan (SIP)
Make small investments through SIPS to create wealth over a period of time.
- Tax Benefits
Some funds offer tax deduction u/s 80C, such as ELSS.
- Transparency
It is a transparent investment which provides updates on the fund’s performance & detailed reports.
- No Lock-in Period
Many of the mutual funds do not have a lock-in period.
Factors to be Considered
When choosing between ULIP & Mutual funds, assess these factors:
- Financial Objective
Flexible, i.e. Mutual Funds or Long-Term, i.e. ULIPs
- Investment Objective
Either investment only or Insurance plus investment
- Risk Tolerance Level
Whether aggressive or conservative approach
Which Plan to Choose?
Investing funds in mutual funds or ULIPs depends entirely upon the financial goals, risk tolerance level, tenure, etc.
Consider ULIP if:
- You have a low risk tolerance level.
- You want to have a longer investment horizon.
- You want to increase your savings with the help of tax exemptions.
- You want an added life insurance coverage for your loved ones.
Consider Mutual Funds if:
- You have a high risk tolerance level.
- You want to meet both long-term & short-term commitments requiring huge investments.
- You are not dependent on these returns only to meet routine expenses.
