Mutual Funds

vs ULIP

Mutual Funds refers to a pool of accumulated sum by various investors who aim at creating financial corpus through their investment. In Mutual Funds, the accumulated sum is invested in various asset classes like equities, debts, liquid funds, etc. Similar to the profit earned over a period of investment, the losses are also shared by the investors in equal proportion based on the investment towards the scheme.

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Similar to Mutual Funds, another lucrative investment option available in the market is the Unit Linked Insurance Plan (ULIP).

ULIPs are investment cum insurance product, which offers the combined benefit of life insurance coverage along with the benefit of investment returns. In ULIP plan, a portion of the premium paid towards the policy is used to provide insurance protection to the family of the insured, whereas the other half of premium amount is invested in marketable securities like equities, debt, etc. To gain profitable investment returns.

To help the investors make an informed choice further here is a brief comparison of mutual funds and other investment options. Also, we have elaborately discussed different aspects of investment in ULIPs and Mutual Funds.

ULIP Compared with Mutual Funds and SIP

The following table shows the difference between Mutual Funds Vs ULIP Vs SIP based on different parameters.

Parameters ULIPs Mutual Funds SIP
Instrument Type Offers the dual benefit of insurance coverage and investment returns. Offers the benefit of investment returns. Offers the benefit of investment return.
Investment Mix In a ULIP plan, the funds can be invested in debt and equity market. In mutual funds, the investments are majorly done in equity, debt, liquid funds, etc. In SIP, the investment is majorly done in the equity market.
Tax Benefit Offers tax benefit U/S 80C and 10(10D) of the Income Tax Act. Only the Equity Linked Savings Scheme (ELSS) offers tax exemption U/S 80C of the IT Act up to the maximum limit of Rs 1.5 lakh. Only the Equity Linked Savings Scheme (ELSS) offers tax exemption U/S 80C of the IT Act up to the maximum limit of Rs 1.5 lakh.
Switching Option Free switches between funds are applicable up to a specific number in the ULIP plan. The investors can switch between funds in mutual funds. However, one needs to take into consideration the implication of exit loan and capital gain tax (CGT). In SIP free switches between funds are applicable.
Life Cover As an insurance cum investment product, ULIP offers the benefit of life cover to the family of the life assured. As a pure investment product, there is no life cover benefit offered under MF. As a pure investment product, SIP does not offer any life cover benefit.
Lock-in Period ULIP has a lock-in period of 5 years. Mutual Funds does not have any lock-in period. In MF only the ELSS fund comes with a lock-in period of 3 years. SIP has a lock-in period of 3 years.
Investment Regulated By IRDAI SEBI SEBI
Death Benefit In case of uncertain demise of the life assured, the death benefit is paid to the nominee of the policy. No death benefit is paid to the investors. No death benefit is paid to the investors.
Fund Management Charges 1.35% N/A 2.50%

*Policybazaar does not endorse, rate or recommend any particular insurer or insurance product by an insurer or any other financial product.

**”The investment risk in investment portfolio is borne by the policyholder”.

*In Budget 2021, to rationalize ULIP taxation, it is proposed to allow tax exemption in ULIP for maturity proceeds having an annual premium up to Rs 2.5 lakh. However, the amount received as death benefit shall continue to remain tax exempted without any applicable limits on the premium amount. The limit of Rs 2.5 lakh on annual premium of ULIP shall be applicable only for plans taken on or after 01.02.2021.

ULIP Compared with Mutual Funds and ELSS

Let’s take a look at the difference between Mutual Funds Vs ULIP Vs ELSS.

Parameters ULIP Mutual Funds ELSS
Returns The returns on ULIP plans can vary as, the investors can choose to invest in a combination of debt, equity and hybrid funds. The returns on mutual funds depend on the market performance of the fund. ELSS is a market-linked product. Thus, the returns depend on the scheme performance. However, investors can expect an approximate return of 12%-14%.
Tax Benefits Tax benefits can be availed U/S 80C and 10(10D) of the Income Tax Act. No tax benefit is offered under Mutual Funds. Equity-linked savings scheme offers the benefit of tax exemption U/S 80C of the IT Act.
Applicable Charges There are different charges applicable on ULIP plan such as:l  Policy administration chargel  Mortality Chargel  Premium allocation charge The investors generally know two types of charges applicable to mutual fund schemes i.e. one-time charge and recurring charge. However, there are many variations to it. Fund management charges and exit load are specified in the scheme information document(SID).
Liquidity Offers moderate liquidity. Offers moderate to high liquidity. Offers moderate liquidity.
Lock-in Period Comes with a lock-in period of 5 years. There is no lock-in period applicable to mutual fund schemes. Comes with a lock-in period of 3 years.

*Policybazaar does not endorse, rate or recommend any particular insurer or insurance product by an insurer or any other financial product.

**”The investment risk in investment portfolio is borne by the policyholder”.

ULIP Compared with Mutual Funds and Fixed Deposit

Here is a brief comparison between Mutual Funds, ULIP and Fixed Deposits based on various parameters.

Parameters ULIPs Mutual Funds Fixed Deposit (Bank FDs)
Tax Savings on Returns The returns offered under ULIP plan are applicable for tax exemption. There is no tax benefit applicable to the returns offered by MF. The returns offered fixed deposits are taxable.
Tax Savings on Premium The premium paid towards the scheme is applicable for tax exemption U/S 80C of the IT Act. The ELSS fund in MF offers tax exemption on the contribution made towards the scheme. The tax savings FD offers tax exemption on the contribution made towards the scheme.
Long Term Capital Gain ULIPs has been kept exempt from long term capital gains. 10% long term capital gain tax applies to mutual fund schemes. Are fully taxable in FD.
Life Cover ULIP plan offers life coverage to the family of the insured in case of any eventuality. As a pure investment plan, there is no life cover benefit offered by MF. There is no life cover benefit offered in FD.
Historical Returns 12%-18% 12%-18% 5%-6%
Lock-in period ULIP plan comes with a lock-in period of 5 years. There is no lock-in period applicable to mutual fund schemes. FD offers a lock-in period of 5 years.

*Policybazaar does not endorse, rate or recommend any particular insurer or insurance product by an insurer or any other financial product.

**”The investment risk in investment portfolio is borne by the policyholder”.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Types of Funds in ULIP & Mutual Funds

Both ULIP and Mutual Funds offer an extensive range of fund options to choose from. As per one's requirement, financial objectives and risk appetite, the investors can choose to invest in the fund options. Let’s take a look at the different types of funds in ULIP as well as Mutual Funds.

  • Equity Funds

    Equity funds are equity-oriented funds, where a minimum 65% of the investments are made in equities and equity-related securities. This fund falls under the moderate to the high-risk category and is best suitable for investors who have a high-risk appetite. In equities, as the risk involved is high the returns on investment are also significantly high. However, the ROI entirely depends on the market performance of the fund. The equity funds are further categorized into:

    • Small-Cap Fund
    • Mid-Cap Fund
    • Large-Cap Fund
    • Multi-Cap Fund
    • Sector or Thematic Fund
  • Debt Fund

    Debt funds come under the moderate risk category. In debt fund, the investment is majorly made in a corporate bond, government securities and low-risk fixed-income securities to gain regular returns on investment. This fund is best suitable for investors who have a moderate risk appetite and wants to gain regular investment returns. Debt funds can be categorized into:

    • Dynamic Bind Fund
    • Income Fund
    • Liquid Fund
    • Short-term and Ultra Short-term fund
    • Glitch Funds
  • Balanced or Hybrid Fund

    These funds are the combination of equity and fixed interest instruments and come under a medium risk category. The hybrid fund offers enough exposure to debt instrument as well as stock markets. The risk carried by equity funds is balanced by the investment made in debt instrument This plan is best suitable for investors who have a moderate to low risk appetite and who wants to gain the benefit of profitable market return with low risk involved. Balanced Funds are classified as:

    • Equity Oriented Hybrid Fund
    • Debt Oriented Hybrid Fund
    • Arbitrage Funds
    • Monthly Income Plans
  • Money Market Fund

    These funds come under the low-risk category and invest in bank deposit, cash and money market instrument that have a lower risk involved. The returns are also comparatively less in money market funds.

Based on the Investment Objective, Which Investment Option Is Right

To make a smart investment, it is important to be clear about the investment objectives. To choose the right investment option there are various aspects, which an individual should consider. Both ULIP and Mutual Funds offers the benefit of market-linked returns. However, with ULIP one also gets the benefit of life coverage. If the sole purpose of an investor is to create wealth over a specific period and if he/she has the right risk-taking ability then they can consider investing in Mutual Funds. Mutual Fund investment is also a lucrative option for investors who have a lump sum savings amount with them, which they want to multiply over a long-term period.

Even though goal-based investments can be done both in ULIP and in Mutual Fund, however, ULIP inculcates disciplined investment habit and above all, it also offers the benefit of life insurance cover and tax savings. Thus, if the financial objective of an individual is to gain profitable returns on investment in the long-term along with the benefit of wealth creation then they should consider investing in Mutual Funds. However, if one wants to gain the benefit of investment returns along with the benefit of tax saving and insurance protection then they should consider investing in ULIP plans.

How to Choose the Best Investment Plan in India?

There are certain aspects that investors should consider while choosing the best investment plan in India. Here is the list of pointers to consider while purchasing one:

    • Analyse the Personal Investment Goals

      Before selecting the investment option; every investor must analyze their long-term financial goals. Whether one chooses to invest in ULIP or mutual fund it must sync with the investment goals and investment horizon. 

    • Check the Past Performance of Fund

      To choose the right fund option to invest in, it is important to check the past 3-5 years performance of the fund. The past performance of funds can indicate future returns. However, it is important to know that it does not have any predictive power to foresee the future of the fund.

    • Decide the Investment Goals

      Before making any investment, one should spend ample time and think about their investment goals. Every individual has different investment goals. For instance, for an individual, their investment objective can be creating a financial cushion for their family, while for others it may be accumulating funds for their children higher education or retirement planning. Once the financial goal is set, one can invest accordingly to fulfil those objectives adequately.

    • Flexibility

      Yet another factor that should be taken into consideration while choosing the right investment option is flexibility. ULIP plans and mutual funds both offer the right flexibility to the investors as they can choose from an extensive range of fund options as per their requirement and suitability. Moreover, both the investment option also allows the investors to switch between funds if they want to. On contrary to ULIP plans, which comes with the lock-in period of 5 years, the mutual fund offers more flexibility as it does not have any lock-in period.

    • Evaluate the Risk Profile and Financial Stability

      To choose the right investment option, an individual must evaluate their risk appetite and financial stability. With the increase in age the risk appetite of individual decreases. Thus, young individuals who typically have high-risk appetite can consider investing in equities. However, individual who have moderate to low-risk appetite should consider investing in debt funds.

    • Understand Different Applicable Charges

      ULIP plan comes with different charges applicable to it. Thus, it is important to understand the different charges levied. These charges include premium allocation charge, initial charge, fund management charge, mortality charge, surrender charges, service and administration. Having proper knowledge and information about these changes can help to filter and select the right plan.

Benefits of Investing in ULIP or Mutual Funds

Several reasons make mutual funds and ULIP an ideal investment option. Take a look at the following benefits offered by both the investment option.

  • Handled by an Expert

    The fund managers manage the investment that is pooled by asset management companies or fund houses. The fund managers are an expert financial professional with a good track record of managing the portfolio of investments. The fund managers are backed by the team of experts and analysts who choose the best-performing stocks and assets and have the potential to provide excellent returns for the investors in the long-term.

  • Switch Fund Option

    Both the investment products offer the option of fund switch. In case somebody wants to move the investment to another fund of the same fund house, then they have an option to switch the investment to that specific fund, from the existing fund. Any good investor knows exactly when to enter and exit a specific fund. If the investors’ witnesses, any other fund has the potential to outperform the market or the aim of investment changes and is in line with the new fund, then they can choose the option of fund switch.

  • Goal-Based Funds

    The individuals invest their hard-earned money to meet the financial objectives. The mutual funds or ULIP plan offers the option, which enables the investors to meet the long-term or short-term financial objectives. Both the investment option offer funds, which caters to every individual's investment horizon, risk profile and investment style. Therefore, with MFs and ULIPs, investors can easily do goal-based investment.  

  • Tax- saving

    Be it ELSS mutual fund or ULIP plan both the options offer the advantage of tax exemption. The premium paid towards the ULIP plan and the contribution made towards the ELSS fund can be claimed for tax exemption Under Section 80C of the Income Tax Act.

Wrapping in Up!

The financial need may vary from person to person. Thus, one must take into consideration the risk appetite, life goals, life stage and responsibilities before making an investment decision.

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