Primarily, there are three types of mutual funds, namely debt funds, equity funds and hybrid funds. Debt funds invest a significant portion in debt securities, while equity funds invest a significant portion in equity instruments. Hybrid funds maintain a balanced portfolio by investing in both debt and equity instruments.
ULIP vs Mutual Funds: Which is Better for You?
The primary objective of every investment is wealth creation over a period of time. With so many investment alternatives available in the market today, choosing the right option can be challenging.
ULIPs and mutual funds are two popular investment plans which allow wealth accumulation by investing in market-related securities.
This article will discuss the difference between ULIP and mutual funds and help you decide the better investment option for you.
What Are Mutual Funds?
Mutual funds are an investment instrument that pools money from several investors to create a large corpus. Fund managers subsequently invest that corpus in securities like stocks, bonds, and other short or long-term investment avenues.
These are efficient investment options for individuals who want to invest in stocks but do not have the acumen and knowledge to track market fluctuations. Such investors can invest a lump sum amount in a mutual fund scheme or opt for a systematic investment plan (SIP) for making periodic investments.
What Is a ULIP?
ULIPs, or Unit-Linked Investment Plans, are insurance policies that offer dual benefits of insurance and investment. Apart from providing life insurance cover to investors, it also offers market-based returns depending on the underlying scheme.
A part of the premium paid by holders covers the life insurance component. At the same time, the remaining part of the premium gets invested in various instruments like shares and bonds. It is a unique financial product that offers an opportunity for sustained wealth creation apart from offering life insurance coverage.
What Are the Differences Between ULIPs and Mutual Funds ?
Some of the key differences between these two investment options are as follows:
These are purely investment alternatives whose main goal is creation of wealth over a period of time.
The primary objective behind ULIPs is offering insurance coverage apart from generating market-based returns.
Lock in period
You are free to redeem your investments as per your needs. However, ELSS is an exception with a lock-in period of 3 years.
You cannot withdraw or redeem your investment before the completion of the lock-in period.
Only ELSS investments come with tax deductions of up to ₹1.5 lakhs under section 80C of the IT Act.
Premium amount paid for an ULIP is eligible for tax deduction under Section 80 C of the Income Tax Act, 1961. The returns of the policy on maturity are tax exempt under Section 10(10D).
Mutual funds come with an expense ratio which covers fund management expenses. Some funds also require you to pay an exit load in case of premature withdrawal.
There are several costs associated with ULIPs, which includes mortality charge, premium allocation charges, fund manager's expenses, etc.
These investment plans have extensive underlying transparency. Investors have easy access to all the fund information, like expenses and asset allocation.
It is a complex financial product having a mix of both investment and insurance. Therefore, investors do not receive regular information on its working, which makes it less transparent.
Returns on mutual funds can be dynamic and vary depending on the type of security.
You receive a fixed return in the form of insurance coverage. Apart from these, market-based returns depend on the underlying securities of the plans.
ULIP vs Mutual Funds - Which Is a Better Investment?
Now that you are aware of the meaning of ULIPs and mutual funds, as well as the differences between the two, let's see which might be a better investment option for you.
- ULIPs provide tax benefits to investors of up to ₹5 Lakhs under Section 80C of the Income Tax Act of 1961. This will go a long way in reducing your overall tax liability. On the other hand, mutual funds, apart from ELSS, do not come with any tax benefits. Therefore, even after investing a huge sum, you will not be eligible for any relaxation.
- Mutual funds only take care of the investment part, and they will be helpful in accumulating or creating wealth over a specific period. On the other hand, ULIPs provide dual benefits of investment and life insurance coverage. In case of the untimely demise of the policyholder, his/her nominee will receive a lump sum payment.
- Another benefit that ULIPs offer over mutual funds is that it allows easy switching or portability between different underlying plans. If you are not satisfied with the performance of an underlying fund/security, you can switch to another option without attracting any major charges.
Hence, we can conclude that if you wish to avail the combined benefits of insurance coverage as well as wealth accumulation by investing in a single plan, ULIPs may prove to be a more beneficial option for you.
Both ULIPs and mutual funds are efficient investment alternatives that provide several benefits to investors. However, individuals should consider their risk appetite and investment objectives before putting their money into these investment plans. Make sure to assess the difference between ULIPs and mutual funds to find out the better option for you.
FAQs about Difference Between ULIP and Mutual Funds
Standard ULIPs allow investors to withdraw a portion of the total premiums paid, which is usually less than 10%. However, certain plans may allow you to withdraw more. However, it should be noted that one can only withdraw from a ULIP after the lock-in period gets over.
Although Unit-Linked Insurance Plans (ULIPs) allow investing in a variety of equity and debt instruments, they are considered to be a risky investment alternative due to the built-in investment component. It is ideal to assess you risk appetite before going for an ULIP as the returns would be based on market sentiments.
Important Guides related to Life Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.