ULIPS or Mutual Funds – Which One’s for You?

ULIPS or Mutual Funds

“Which is better ULIPs or Mutual funds?” The debate is now going on for a decade; both ULIPs (Unit Linked Insurance Plan) and mutual funds vie for the same pie of investors who want to grow wealth over the long-term investment and seek market-linked returns. Due to market swings and regulations over recent years, the fortunes of both financial instruments have fluctuated.

But the announcement of long-term capital gains (LTCG) tax in 2018, on equity investments in the budget, has twitch things up again. So, the question that arises is how do these two instruments stack up against each other?

Crucial Difference between the Two ULIP & Mutual Fund

One of the crucial differences between ULIPs and mutual funds is that ULIPs offer life cover while mutual funds don’t. The insurance company under ULIPs promises to support your family financially in case of your untimely demise.

Detailed Example

Let’s understand this with an example:

If Mr. X invests Rs 20,000/- in a ULIPs (Unit Linked Insurance Plan), while Mr. Y buys mutual fund units worth of Rs 20,000/-. This money works as an investment for both Mr. X and Mr. Y. However, every month, a part of MrX’s investment is taken as insurance cover, which acts as the ‘protection element’ or ‘insurance premium’. This buys him an insurance cover of 2 lacs. In Mr. Y’s case, he would need to buy an insurance policy separately to get a life cover. If Mr. X meets with any mishappenings and passes away, the insurance company would compensate his family with 2 lacs or the fund value, whichever is higher. But this is not the same in the case of Mr. Y.

List of Comparisons Between ULIPs & Mutual Fund

To know more regarding where to invest for safety; let’s understand the difference between ULIP and Mutual Fund and see which one supersedes the other regarding benefits.

COMPARISIONMUTUAL FUNDSULIPs
Type Of ProductOnly investmentInvestment +Insurance
InvestmentPure investmentPart insurance and part investment in bonds, equity,debts, etc.
InsuranceNo life coverLife cover provided
Tax-benefitsUnder Section 80(C), only ELSS based investments are tax-free up to Rs.1.5 lacs.Under Section 80 (C), the premium paid towards the plan up to Rs.1.5 lacsis tax-free.
Under Section 10 (10D), the sum assured paid to the nominee would also be tax-free.
ReturnsEquity oriented investment gives high returns.Moderate to high returns Net Asset Value (NAV) depending on theperformance of the market and the type of investment funds.
Depends highly on market performance and the allocation of funds.
Ideal termCan be short, medium or long term.Long term.
Fund Management ChargesCharges are 2.5%Higher for the initial years up to 5 years, and later 1.35%
Lock-in PeriodNo lock-in period, except ELSS which have a lock-in period of 3 years.5 years
LiquidityMore liquid, except with ELSS which have a lock-in period of 3 years.Need to wait for the completion of the lock-in period of 5 years.
When to consider buyingWhen you wish to gain high returns of sum and have disposal money.When you are ready to take investment risk and want to provide financial security.

ULIPs or Mutual Funds-Which one is the Best for You?

So, here is your answer.

For ULIPs-

  • When you are looking for long term investment plan
  • When you want to invest in something that gives tax benefits
  • When you have a low, medium or high-risk appetite
  • When you want investment along with the life cover that provides supports your family financially in case of eventualities.

For Mutual Funds-

  • When you want your investment to be flexible or liquid
  • When you already have term life plan to protect your family financially
  • When you want returns in short or medium terms

Where To Invest, ULIPs or Mutual Funds?

Investment and insurance are the two most important aspects of your financial life; you should understand the difference between them. Both investment and insurance serve a different purpose; one (Investment) helps to build your wealth over time while others (Insurance) protect your family in case of any eventualities.

One of the most significant advantages that mutual funds have over ULIPs is their history, as mutual funds are in a market for a longer period, and investors can look at the history of returns. But that doesn’t mean that ULIPs are the bad option. If you want longer investment, then you should go for an equity-oriented mutual fund or ULIPs with bigger exposure to equities.

Unit Linked Insurance Plans from reputable insurance companies such as Max Life Insurance provide you with an insurance-cum-investment option. As a part of the premium paid is deducted in the form of mortality charge, which gives life cover while the remaining premium is invested in equity or debt funds.

Conclusion

However, we hope through this content, you will get an entire picture regarding your investment decisions. For a long term investment plan, we would recommend ULIPs while for liquid investment, Mutual Fund is best for you.

Author: Ankita Sarkar

Ankita is a graduate in English language and she has also done her MBA from the Calcutta University. She has a high knack in the stock markets. She is a NISM certified Research Analyst. An experienced stock market content writer Ankita is also trading successfully on her own account.

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