ULIPs vs Mutual Funds - Which is a Better Investment Option?

ULIPs vs Mutual Funds – Which is a Better Investment Option?

You need to build financial strategies if you want to accumulate a financial corpus over the long run to secure your and your family’s future economically. There are various investment options available in the market where you can invest your money to create effective long-term wealth. Two such popular options are Unit Linked Plan (ULIP) and mutual fund. Though the objectives of both the options are the same, that is, build an economic corpus to help you to fulfil your future long and short-term dreams, essentially, they are different in nature. If you are in a dilemma which option will be beneficial for you or if you are not clear about the differences between these two types of investment options, your search ends here because today, in this article, we are going to discuss in detail about them and their differences.

What is Unit Linked Plan (ULIP)?

Unit Linked Plans have come up with a combination of dual facilities, namely insurance cover and also investment options, where you can invest your hard-earned money in different fund options to generate returns under a single integrated plan. It is one of the latest and largest financial products introduced by investors. There are different fund options available under the ULIP, such as Equity Fund, Debt Fund, Bonds, etc. Under a ULIP plan, a part of the premium paid towards the policy is used for life coverage, and, at the same time, the rest is invested in different types of market instruments.

What Do You Mean By Mutual Fund?

On the other hand, the mutual fund is another investment program that is managed by an AMC (Asset Management Company) where that manages the money of several investors. It is a single financial trust that collects funds from investors and further invests them in different securities such as bonds, stocks, money market instruments, etc., and its performance is dependent on these only.- The basic objective of the mutual fund is to provide the investors with maximum returns over ap period of time. Its function depends on various parameters such as the type of market, the duration, and the different risk factors.

Comparative Study Between ULIPs and Mutual Funds

To make it more explicit and understandable, here is a table that contains a detailed comparative study between the ULIPs and the mutual fund. Have a look.

ParametersULIPsMutual Funds
Primary objectiveIt is an insurance product that is added with the advantage of market-linked investments.Basically, it is an investment product that aims to offer you the maximum returns to create wealth.
The goal of the planIt aims to offer life protection to you and your family along with the investment long-term investment options.Its sole aim is to help you to the financial corpus to fulfill your short-term goals.
Regulatory boardIt is under the observation of the Insurance Regulatory and Development Authority of India (IRDAI).The Security and Exchange Board of India (SEBI) takes care of the mutual funds.
FlexibilityUnder a ULIP, you can decide which portion of your premium will be invested and which portion will be used for your life insurance cover.As it is a sole investment plan, no such flexibility can be found in mutual funds.
Fund switching optionsYou can switch the fund according to your convenience to reap maximum benefits. You may be charged a nominal fee for this, depending on your insurer.Under a mutual fund, you do not have the freedom to switch funds.
Lock-in periodThe lock-in period under a ULIP plan is a minimum of 5 years.There is a 3-year lock-in period for tax-saving ELSS schemes and no lock-in period for regular mutual funds.
Return on investmentThe amount of return is lower than the mutual fund.It offers you maximum returns, but that is dependent on the market risks.
Who should opt for thisWhen you want a plan that will offer you life protection and also will help you build wealth in the long run, you should go for the ULIP.Those who have the capability to take high risks and want to reap maximum benefits should go for it.
Tax exemption benefits

The premiums paid towards the ULIPs are eligible for a deduction under Section 80C up to a maximum of Rs 1.5 Lakhs.

Returns on ULIPs are tax-free under Section 10(10D) of the Income Tax Act, 1961.

Depending on the holding period, a tax of 10% on Long-term Capital Gains (LCTG) and a tax of 15% on Short-term Capital Gains (SCTG) are levied in the case of equity funds.

For debt mutual funds, LTCG tax is levied at 20% after indexation, while STCG tax is levied according to the investor’s income tax slab.

Under Section 80C of the Income Tax Act, 1961, Equity-Linked Savings Scheme (ELSS) funds to qualify for a tax deduction of up to Rs. 1.5 Lakh.

Fund management charges1.35%2.50%
Compensation and risk coverIn case of the untimely demise of the life assured, the sum assured is given to the nominee or the beneficiary.In the case of the unfortunate and untimely death of the policyholder, the investments are transferred to the nominee/beneficiary.
Additional benefitsAdditional loyalty benefits or any other applicable benefits are offered.No provision of additional benefit is there.
Ideal termIt is ideal for long term benefits.It is more suitable for short term benefits though you can invest the amount on a long term basis.
TransparencyIRDAI always provides upfront information on fund allocations.The fund houses are mandated to provide a detailed report of the mutual fund investments.
LiquidityULIPs are not that very liquid.Mutual funds are more liquid as it is widely traded in the market.

Factors To Keep in Mind Before Deciding Between ULIP and Mutual Fund

Before jumping to a conclusion about your preference of investment option, consider the following factors that can influence your choice.

Scope and Requirements – If you only need an investment option, then a mutual fund is better for you. But, if you need something that will offer you the dual benefits of insurance and investment, then the ULIPs are more suitable for you.

Investment Returns – Usually, the ULIPs offer lesser returns than mutual funds. The earnings of the investor will be low compared to the money they initially invested if any mishap occurs. But it is more reliable than the mutual fund due to lower risk factors and life insurance cover facility.

Risk-taking Capability – Both ULIPs and mutual funds are market-linked plans, and their returns totally depend on the market, stocks, etc. In both cases, the insurance risks have to be borne by the policyholder only. But mutual funds are riskier than the ULIPs. You may even lose your entire investment, and the financial loss you may not revive again So, after assessing your risk-taking capability, you should opt for the one.

Investment Flexibility – As you already know that under the ULIPs, you can not only switch the fund according to your preference, but also you can decide which portion of your premiums will be used for life insurance cover and which portion is to be invested, whereas the mutual funs do not offer any such flexibility. So, on the basis of your needs, decide what will be more beneficial for you, and go for any one of them.

Expenses – There are several charges levied for investment in ULIPs, such as premium allocation charge, fund management charge, administration charge, mortality charge, partial withdrawal charges, etc. But there is no entry or exit fee on liquid mutual funds. Mutual fund charges are limited to professional management fees and operational fees.

Tax Benefits – Though you are eligible for tax exemption benefits on the ULIPs under Section 80C and 10(10D) of the Income Tax Act, 1961, ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than Rs. 2.5 Lakh, and such policies will be taxed at 10% at maturity. In the case of mutual funds, tax deductions are not applicable for all mutual funds. So, it can be one of the influential parameters when choosing the more suitable investment option.

Your Objective – If you want to invest on a long-term basis and create a financial corpus after a certain period of time to fulfill your dreams, ULIPs are ideal for you, whereas, for short-term goals mutual funds are preferable.

Which One Has The Upper Hand - ULIP or Mutual Fund?

After the prolonged discussion, it can be understood that which investment option is suitable for you totally depends on the aforesaid factors. Both options are good, but on the basis of your requirements, your aims, your financial background, risk profile, investment duration, etc., your priority may differ. If you want to save for your retirement days, your child’s education, or marriage, ULIPs are more favourable. On the other hand, if you are savvy with the equity market and you have a higher risk-taking capability, mutual funds are the better option for you. Before investing your hard-earned money into anything, you need to take into consideration the factors and analyze and understand the market. In fact, you can also take help from an economic advisor, if necessary, but do not get influenced or tempted only by the returns. Therefore, choose wisely, and cut your cloth according to your hay.

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