ULIP vs Fixed Deposit

What is ULIP?

A Unit Linked Insurance Plan (ULIP) is a unique and popular financial tool which provides the investor with the double benefit of life cover and market-linked investments. It allows for flexibility while ensuring that the family of the investor remains financially protected and the investor can step into the market and invest in the various funds offered by the ULIP plan. The following points summarise the key features of ULIP. 

• Life insurance: A ULIP Plan provides the investor with life cover. A portion of the premium paid by the investor is used to ensure that the family of the policyholder remains financially secure during the policy term irrespective of the presence of the policyholder. 
• Flexibility: A ULIP plan is highly flexible as it allows the investor to choose between various funds and also shift their money from one fund to another as per their risk tolerance and financial needs. 
• Tax Saving: A ULIP plan also allows for deductions on the premiums made by the investor under Section 80C of the Income Tax Act.
• Lock-in Period: A lock-in period of 5 years is mandated for a ULIP plan. 
• Risk: The returns earned through a ULIP plan are subject to market risks. The returns heavily depend on the performance of the market and are not guaranteed.

What is a Fixed Deposit?

A fixed Deposit is a simple savings product which allows you to invest a lump sum of money in a bank of your choice, which earns interest on the sum for a fixed period of time. The returns generated through a Fixed deposit investment are guaranteed and ensure that your capital remains protected. The following features summarise the key features of an FD. 

• Fixed Interest Rate: The interest rate of a fixed deposit remains constant throughout the tenure of the FD. This means that the rate at which you invest your lump sum amount into the FD will remain constant despite fluctuations in the repo rate. 
• Flexible tenure: You can choose the tenure of your Fixed deposit. The longer the tenure, the higher the returns.
• Loan against FD: You can use your FD as collateral and take a loan against it.
• Capital security: An FD ensures that your capital is completely protected and faces no risk whatsoever. You returns are guaranteed and your initial investment also remains safe. 

Fixed Deposit vs ULIP

Let us discuss the difference between FDs and ULIP 

FD vs ULIP: What Should You Choose? 

1. You should choose ULIP if

   • You wish for life coverage for your family.
   • You wish to create wealth using market linked investments.
   • You are risk tolerant.
   • You can monitor the market and create a dynamic investment strategy accordingly.
   • You wish to invest for a long term financial goal.
   

2. You should choose FD if

   • You wish to avoid risk 
   • You want guaranteed returns
   • You wish to avoid timing the market 
   • You want a diverse portfolio 
   • You have a short to medium term goal

Conclusion 

You can choose between an FD and a ULIP as per your financial goals and your risk tolerance. While a ULIP can provide you and your family with life cover and market based wealth creation, it also comes with its own share of risks. An FD on the other hand allows you to earn interest on a lump sum investment, the earned by an FD are less as compared to the returns generated by a ULIP plan. While both these tools are good financial tools you can consider investing through the best investment plans as per your financial goals.