Letting your money sit idle in your savings account does very little if you want it to achieve considerable growth over the years. Similar to how your muscles need exercise to allow them to get stronger and healthier, your money also needs to be put into the right investment channels to notice any improvements.
Mutual funds are one of the popular investment options today. However, one may observe that these do not offer as many peripheral benefits as ULIPs may. Unit-linked insurance plans, or ULIPs, are ideal for insurance plus investment benefits in a single plan.
What are ULIPs?
ULIP is like your lifelong bodyguard - an investment that builds your wealth 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 dependents’ financial security with life coverage.
Pros and Cons Of ULIP
Here are some of the common ULIP benefits investors may experience.
Dual benefit of investment plus insurance.
Tax benefits on the premiums paid and the maturity amount under Section 80C and Section 10(10D) as per prevailing Income Tax Laws.
Flexibility to switch investments, to maximise returns and protect against market volatility.
Five-year lock-in period enables earning better returns.
While these numerous benefits can make ULIP look like an easy choice, here are some of the cons to consider.
Multiple charges reducing the actual investment amount.
Susceptibility to market risks as ULIPs invest in market-based instruments for better growth.
Five-year lock-in periods that make ULIPs relatively less liquid, which may be a hindrance, especially during emergencies.
What are Mutual Funds?
An equally worthy ally, Mutual Funds (MF) are a good option for people eager to invest in stocks and shares but lacking 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. Mutual funds do not have any insurance component.
Pros and Cons of Mutual Funds
Mutual funds are a common recommendation when it comes to investment options, and for a few good reasons. Here are some of them.
Professionally managed by Asset Managers who identify the best stocks for generating maximum profits.
Investment in multiple companies and sectors for diversifying risk.
Easy liquidity for funds (other than ELSS).
Tax exemptions under Section 80C for investments up to Rs. 1.5 lakhs (for some funds such as ELSS).
Rupee cost averaging via SIP.
Like every good investment instrument, mutual funds also come with certain cons. Here are some of them.
An exit cost is applied if funds are redeemed before their tenure.
Although diversification protects from imminent loss, it also restricts the profits that could be earned by higher investments in profitable sectors.
Returns are not guaranteed and can fluctuate depending on market performance.
High expense ratios and sales charges reduce overall investment returns.
Investors have no control or flexibility.
Comparing ULIPs vs. Mutual Funds
Pitting ULIPs vs mutual funds can help investors understand what options are most suitable for them. However, a comparison between the two does not imply that one will trump the other. This table will help you understand the difference between ULIPs and mutual funds.
| | 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 lower than MF as there is also a life Insurance component that reduces 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:
They attract STCG and have no indexation benefit
|
| Applicable Charges | Policy administration, premium allocation, mortality, and other charges are applicable | Lower costs with SEBI capping 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 |
Where Should 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 can benefit people who:
Want a long-term investment horizon
Prefer the added security of insurance cover for their family
Have a low to medium risk appetite
Want to increase their savings with tax exemptions
Mutual Funds tend to better suit people who:
Want to fulfil both short-term and future-focused goals that need substantial investments
Have a high-risk appetite
Do not depend on the MF returns to support their regular expenses
Just 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 requirements & financial goals.
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