Everyone wants to accumulate wealth over time through various investment options available in ULIP and Mutual Fund gateways. You invest with potential wealth multiplier so that the option provides you with higher returns with long-term financial security.
Let’s start with understanding the terminology before getting into the details of the investment aspect.
ULIPs vs Mutual Funds
Mutual funds are popular investment options. They primarily act as a trust. Money from investors, individual or institutional, is invested with a common goal of pooling together in a range of debt and equity to invest. Mutual funds are mostly managed through fund managers. Fund managers are authorized to make investment decisions On behalf of the investors. Mutual funds are identified through various parameters like the investment duration, type of market, and the risk factor of the business.
ULIPs are the latest financial products which have been brought in for investors. Unit-Linked Insurance Plans (ULIPs) are insurance policies to provide an insurance cover to investors along with inculcating returns based on investments made through varied business avenues. In this kind of investment, an insurance company floats a scheme to invite investors with an insurance cover running alongside the business investment. ULIPs typically invest in debt instruments, equity shares, and bonds.
ULIP is a kind of insurance policy combining the advantage of saving and protection in a single step. The ULIP looks like a traditional wealth creation tool with a Life Cover acting as a major advantage. Money grows with future protection of loved ones’ in case life takes an unexpected turn as the future always remain uncertain to all of us.
How ULIPs work?
A ULIP is an insurance policy and an investment. It even has an advantage wherein it specifies a death benefit. It notifies the amount that a nominee will be paid in case the policyholder passes away during ULIP term. In case of policy holder’s survival through the term of the ULIP, the person will also get the maturity value of the ULIP, which was generated during ULIP investments in equity and/or debt. Typically, policyholders are permitted to choose ULIP asset and fund categories to generate and get returns of their choice. This advantage is also called the investment component of a ULIP. One of the best features of ULIP is the policy holder’s nominee(s) will be paid the death benefit specified even if the value of the ULIP investments falls below the sum assured specified in the ULIP.
Let us now understand the benefits associated with ULIPs.
Regular Savings: ULIP helps in developing a habit of disciplined and small regular savings is successful in long-term financial planning. Benefits of wealth creation are enjoyed along with regular premium payments.
Protection: ULIPs provide the protective Life Cover advantage for keeping your loved ones secure in case of any untoward incident in life in your absence.
Investment Flexibility: Flexibility and control of money can be attained through the following ways:
- Premium Redirection to invest the future premium in various funds of personal choice
- Fund Switch to move money between balanced, equity, and debt funds
- Partial Withdrawal to permission for withdrawal of a part of invested money
- Top-up to put additional money to existing savings
Tax Benefits: Investment in ULIPs is eligible for deduction from taxable income under Section 80C of the Income Tax Act, 1961 with up to ₹ 1.5 lakh per annum. The maturity proceeds of the ULIP are also exempt from tax under Section 10(10D) of the Income Tax Act subject to conditions specified therein.
Growth Potential: Due to higher returns from the power of equity and debt funds helps in achieving life-goals like a new home, dream car, your child’s higher education, etc. Ideally, it depends on the individual to get the perfect investment decision which is suitable for him/her. The following points may be considered before deciding the best option:-
MUTUAL FUNDS are best if you want to have:-
- A short-term or a medium-term investment horizon.
- A term insurance plan already in place.
- High liquidity.
- A high or medium risk appetite.
ULIPs are best if you want to have:-
- A long-term investment horizon.
- A life-cover built-in with your investment.
- A low to medium risk appetite.
- Savings on your taxes.
ULIPs vs Mutual Funds – Better Investment Option
Return on investment
The returns from ULIP are lesser as they promise a fixed sum even when the investment plan fails to make money. The mutual funds’ returns vary with the risk factor. Equity mutual funds have higher returns, while debt mutual funds have lower returns.
ULIP essentially is an insurance product with a lock-in period ranging between three to five years as the structure and nature of the investment. Mutual funds have a lock-in period of one year to three years.
ULIPs are a highly sophisticated mix of risk cover and investment with the less transparent structure on expenses and allocation of the asset. Mutual funds are relatively transparent about the fee charged and the portfolio holding.
Benefits of Taxation
Investment in ULIPs is eligible for deduction of Income Tax under Section 80C of the Income Tax Act, 1961. Mutual funds have tax deduction only against investment in ELSS and no tax deductions, and redemption is applicable on any other product.
ULIPs have an in-built insurance plan to assure family cover in case the policyholder dies during the term of the policy. Mutual funds give no risk cover as insurance. The policyholder is required to buy a separate insurance plan and pay an additional premium.
ULIPs vs Mutual Funds: Final Word of Advice
The decision to get into an investment scheme should depend on the answers that you give to yourself for the above-mentioned factors. Never get into a rush to make an investment decision. It is better to exercise diligence and research before finalizing. ULIPs providers like ICICI Prudential provide investment strategies like Systematic Transfer Plans and lifecycle-based investing to suit your future goals. The earlier you plan with a ULIP, the earlier the personal goals are achieved. It is always advisable to get yourself situation-ready for any unforeseen and untoward circumstances. This will also ensure you to better take care of your loved ones, even in your absence.