Growing your money is like building your body. Let it lie around and it’ll get lazy. But give it some heavy lifting, and it’ll pump up your capital.
To give your money more muscle, you need ULIPs and Mutual Funds (MF). Both investments have the potential for long-term wealth creation and savings through tax exemptions. Understanding them better will help you make an informed decision.
What is ULIP and Mutual Fund?
ULIP is like your lifelong bodyguard - an investment builds your wealth builder and provides insurance. Worried about funding your family’s long-term goals if something happens to you? ULIP leverages various assets to generate the returns you want, and further ensures your dependants’ financial security with life coverage.
An equally worthy ally, Mutual funds (MF) are a good option for people eager to invest in stocks and shares but lack the financial acumen. Mutual funds pool funds collected from various investors and invest them in equity, debt, bonds, and other money market instruments, depending on the scheme.
ULIP vs MF: Different but Equal
ULIP vs mutual fund does not imply that one trumps the other. They are both recommended investments. This table will help you understand the difference between ULIP and mutual fund.
| Unit Linked Insurance Plans (ULIPs)
| Mutual Fund (MFs)
|
| Investment Type | Offers investment and life insurance coverage.
Invests in equity, debt, and hybrid funds
| No insurance component
Invests in stocks, bonds, and short-term debt
|
| Investment Objective | Offers wealth creation, insurance coverage, and tax relief | Ideal for long-term wealth creation
|
| Regulatory Body | Insurance Regulatory and Development Authority of India (IRDAI) | Security and Exchange Board of India (SEBI) |
| Risk and Returns | Returns depend on market performance.
However, nominees receive the sum assured in case of the policyholder’s untimely demise.
Returns are comparatively low than MF as it also offers Life Insurance component could reduce the investment amount, and hence, returns.
Higher charges further erode the investment component
| Risk and returns vary from low to high depending on the scheme & market performance.
|
| Lock-In Period | Five years
| No lock-in period, except for ELSS (Equity Linked Savings Schemes) which have a 3-year lock-in period
|
| Tax Benefits | Depending on the relevant tax conditions as specified by the Indian government, you may get some tax exemptions and ULIP benefits under Section 80C and 10(10D) of the Income Tax Act of 1961.
These ULIP benefits are subject to the provisions made under the IT Act and may be amended periodically.
| Equity funds:
STCG (short-term capital gains) are taxed at flat 15% if units are redeemed within a year.
LTCG (long-term capital gains) of up to Rs 1 lakh a year are tax-exempt but if exceeded, attract 10% tax without indexation benefit.
Debt funds:
Debt funds attract STCG and have no indexation benefit
|
| Applicable Charges | Policy administration, premium allocation, mortality, and other charges are applicable
| Lower costs as SEBI has capped the expense ratio to 1.05%
|
| Lock-In Period | Five years
| Three years for ELSS plans |
| Flexibility | Allows switching between funds based on market performance and policyholder's changing financial goals.
Investors can choose the amounts allocated for insurance and investment
| Does not allow switching between funds but offers different schemes to suit investors’ goals and risk appetite
|
ULIPs vs Mutual Funds: Pros and Cons
ULIP Benefits:
1. Dual benefit of investment plus insurance.
2. Tax benefits on the premiums paid and the maturity amount under Section 80C and Section 10(10D) as per prevailing Income Tax Laws.
3. Flexibility to switch investments maximises returns and protects against market volatilities.
4. Five-year lock-in period enables earning better returns.
5. SIP (Systematic Investment Plan) enables rupee cost averaging.
ULIP Disadvantages:
1. Multiple charges reduce the actual investment amount.
2. Susceptible to market risks as ULIPs invest in market-based instruments for better growth.
3. 5-year lock-in period can be a hindrance especially during emergencies.
MF Benefits:
1. Professionally managed by Asset Managers identify the best stocks to generate maximum profits.
2. Investment in multiple companies and sectors diversifies risk.
3. Easy liquidity for funds apart from ELSS.
4. Some funds such as ELSS may offer tax exemptions under Section 80C for investments up to Rs. 1.5 lakhs.
5. SIP makes MF affordable and benefits with rupee cost averaging.
MF Disadvantages:
1. An exit cost is applied if funds are redeemed before their tenure.
2. Though diversification protects from imminent loss, it also restricts the profits that could be earned by higher investments in profitable sectors.
3. Returns are not guaranteed and can fluctuate depending on market performance.
4. High expense ratios and sales charges reduce overall investment returns.
5. Investors have no control or flexibility.
ULIP vs Mutual Fund: Think Before You Invest
Both ULIP and mutual funds offer the potential for better returns, tax-saving, and long-term wealth creation. Choosing between the two, however, depends on your risk appetite, current commitments, and financial goals.
ULIPs benefit people who:
- Want a long-term investment horizon
- The added security of insurance cover for their family
- Have a low to medium risk appetite
- Want to increase their savings with tax exemptions
IndiaFirst Life offers a number of ULIP plans, like IndiaFirst Life Radiance Smart Investment Plan, IndiaFirst Life Wealth Maximizer, and IndiaFirst Money Balance Plan.
Mutual Funds suit people who:
- Want to fulfil both short-term or future-focussed goals that need substantial investments
- Have a high risk appetite
- Do not depend on the MF returns to support their regular expenses
Like personal fitness, your financial fitness also needs the advice of experts. Whether it’s ULIP or mutual funds, evaluate your investment objective, financial goals and risk profile before choosing the right option. A financial expert will be able to find the right solutions for you after thoroughly assessing your requirement & financial goals.
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