ULIP vs Mutual Fund

For a better financial future, it is extremely crucial to choose an investment option that is best suited to you. ULIPs and Mutual Funds are 2 extremely effective and efficient financial strategies available in the market that an investor can opt for if they are willing to create decent wealth in the future.

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ULIPs and Mutual Funds are 2 investment options that have their own advantages and disadvantages. It is completely the decision of the investor which option to opt for depending upon their financial goals and needs. Let us understand in-depth about both the investment options and compare them so that an investor is able to make a wise and informed decision in the end.

What are ULIPs (Unit Linked Insurance Plans)?

ULIPs or Unit Linked Insurance Plans are plans that include the benefits of both insurance and investment. This insurance plus investment plan helps in the creation of wealth as well as protects the family of the insured after their untimely demise. It is undoubtedly gaining huge popularity these days and is considered one of the best sources of investment for moderate to high risk taking investors.

The investment amount in the ULIP is divided into 2 parts:

  • One part of the premium is to provide life insurance coverage.

  • The other part of the premium is used for investments in debt and equity funds to reap financial benefits.

The amount invested in ULIP can be chosen as per the financial goal of the investor.

What are Mutual Funds?

Mutual Fund investments are growing by leaps these days as more and more investors are taking up this option for investing their money in the market. Investments in Mutual Funds can be either made through the SIP (Systematic Investment Plan) method or through the lump sum method depending upon the pocket of the investor. If an investor has a decent amount in hand for investment, they can either:

  • Put all their money at once in the mutual funds of their choice through the lump sum method.

  • Can opt for the SIP method and invest at a regular interval as per their convenience.

ULIPs (Unit Linked Insurance Plans) and Mutual Funds have their own benefits which should not be compared to one another. Still, investors often get confused as to which investment option to go for between these 2. This brings us to the most asked question.

Which is Better: ULIPs or Mutual Funds

Both ULIPs and Mutual Funds offer different benefits to their investors from one another. Let us know the benefits of both the investment options to understand the basic difference between them.

  1. Benefits of ULIPs

    • It is an investment plus insurance plan.

    • No other plan in India serves a dual purpose for the investor.

    • Generally, comes with a 5-year lock-in period that helps in saving money for the future.

    • Partial withdrawals can be made after the completion of the lock-in period.

    • Offers tax exemptions under the Income Tax Act, 1961.

    • Offers easy switching between funds facility to investors.

    • Allows diversification in the investor’s portfolio that helps them in the future.

    • Flexibility to redirect future premiums to funds of the investor’s choice.

    • A guaranteed sum assured is provided to the nominee in case of the untimely death of the investor.

    • Provides long-term benefits along with high returns.

  2. Benefits of Mutual Funds

    • Mutual funds offer flexible withdrawals

    • Liquidity of funds can be attained at the investor’s convenience.

    • Money can be invested from low-risk taking funds to high-risk funds that help in portfolio diversification.

    • The fund manager manages the funds, which plays a major role in the growth of the fund.

    • If opting for tax-saving funds, in particular, a lock-in period of 3 years needs to be served.

    • Involves an easy investment method along with decent returns.

    • Only ELSS funds qualify for tax exemption benefits.

    • Investments can be made in multiple mutual funds at the same time.

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

Factors to Be Considered Before Choosing Between ULIP and Mutual Funds

Following are the key points one should consider before selecting any investment option for investment:

  • Future scope of the investment option.

  • Returns on the investments.

  • The flexibility granted to the investor while making an investment

  • Tax benefits available

  • Transparency while allocation of funds

  • Risk coverage involved

In the end!

Both Unit Linked Insurance Plans and Mutual Funds have their own advantages and drawbacks, but the final choice depends upon the investor and their financial backup completely. The risk profile, financial background, and investor’s appetite are the key factors that one should consider before making any kind of investment for better returns. It is extremely important for an investor to choose their investment wisely before taking any step forward.

Happy investing!

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