ULIP vs Mutual

ULIPs vs Mutual Funds- Which is Better?

With recent financial innovations and the surge in investing in Indian financial markets, today, investors like you have a plethora of investment options. Smart investors always look for better options that generate wealth by taking nominal risks. Often the struggle is to decide which is the better investment, ULIP Vs Mutual Funds?

Irrespective of the financial assets you choose to park your money in, the ultimate goal is that it should build your finances and investment portfolio, fetching the highest return with minimal risks.

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

 

What are mutual funds?

Mutual fund investments pool money from multiple investors and invest it further in the market. There are different types of mutual funds, such as debt, hybrid, equity funds, etc. Each fund invests in market securities based on its type. For instance, debt funds invest in fixed-income instruments like certificate of deposits, government securities, etc. Equity funds invest in stocks. Hybrid funds invest in a combination of stocks and fixed-income securities.

You can invest in mutual funds in a lump sum. Alternatively, you can also invest through a SIP (Systematic Investment Plan) and make small, regular investments in a fund of your choice over time.

 

What are ULIPs?

Unit-Linked Insurance Plans (ULIPs) are insurance products that also lets you invest in the funds of your choice. They are dual-benefit products. A part of the premium that you pay is contributed towards the insurance sum. This is given to your nominee in the unfortunate event of your demise during the policy term. The other part is invested in debt, hybrid or equity funds, depending on your choice and risk appetite. This money is given to you at the end of the policy term and can be used to fulfil various financial goals.

Difference Between ULIPs and Mutual Funds

Parameters

Unit Linked Insurance Plans

Mutual Funds

Objective

Wealth creation along with life insurance coverage.

Purely investment based, that helps in wealth creation.

Aim

To create wealth in the long run along with protecting the future of the family in the absence of the investor.

To create wealth by investing in funds ranging from low to high-risk as per the pocket of the investor.

Regulated by

IRDAI (The Insurance Regulatory and Development Authority of India)

SEBI (The Securities Exchange Board of India)

Returns

High returns depending on the market

Equity mutual fund investments offer high returns along with high risk involvement.
Debt mutual fund investment offers moderate to low returns with medium to no risk involvement.

Lock-in Period

Minimum 5 year lock-in period

3 year lock-in period for ELSS funds
No lock-in period for regular mutual funds

Tax Benefits

Premiums paid under ULIPs are tax-exempted annually up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.
Additionally, the maturity amount is also tax-free under Section 10 (10D) of the Income Tax Act, 1961.

Only ELSS funds are exempted from tax up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.

Fund Management Charges

1.35% approximately

2.50% approximately

Systematic Investment Plan Option

Available

Available

Switching Option

Switching between funds is easily available and helps in managing the risk.

Switching is not available.

Term Period

Long term

Varies from short to medium term

 

Which is better - ULIPs or Mutual Funds?

The choice between which is a better investment ULIP or mutual fund, should depend upon your financial goals, needs, and objectives.

For instance, if liquidity is a paramount concern, mutual funds may emerge as a compelling choice. ULIPs typically entail a mandatory lock-in period of 5 years, limiting liquidity options. Admittedly, it’s worth noting that not all mutual funds offer high liquidity, as certain tax-saving mutual funds (such as ELSS funds) mandate a 3-year lock-in period.

On the flip side, those seeking both insurance coverage and wealth accumulation might find ULIPs to be an attractive proposition.

In essence, ULIPs predominantly serve the purpose of safeguarding an investor’s life, while mutual funds are primarily geared toward fostering wealth growth. Hence, the decision should be made wisely, ensuring a gratifying investment journey.

Frequently Asked Questions

Premium payments towards ULIP and maturity amount are eligible for tax deduction under Section 80C) of the Income Tax Act, 1961, up to Rs.1.5 lakh per financial year. This will be applicable only if the premium amount is below 10% of the total sum assured. Maturity payout is also exempted under Section 10(10D). Also, death benefits paid to the nominee will not be taxed.
The expense ratio is the operational and professional management fees for mutual funds. An ideal expense ratio falls between 0.50% and 0.75%. The expense ratio is important to consider when investing in mutual funds as it affects your return.
Often ULIPs are confused with mutual funds. But ULIPs are generally the type of insurance policies that also provide opportunities for wealth creation. It offers a dual benefit of insuring you and generates a healthy investment return. It is not purely an investment product, although similar parallels are drawn.
Mutual fund investment period depends on the investors and their financial objectives. Unlike some mutual funds such as ELSS which have a lock-in period, there is no fixed investment term for mutual funds.
ULIP and mutual funds both are flexible investments. You can decide how much of your fund will go towards insurance premiums and how much will be invested in market-linked instruments. Similarly, in mutual funds, you can choose which type of asset to invest in, equity, debt, or a combination of both.
Regrettably, converting your ULIP to a mutual fund scheme is not an available option. Despite incurring a loss, surrendering your policy is a prudent decision. You can proceed with surrendering it now and accessing the fund value once the 5-year lock-in period has ended.