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22/08/2022 |
The investment landscape has a wide range of options for investors with different risk tolerance levels. Choosing the right instruments and asset classes are important decisions that can help generate returns on your investment.
While fixed deposits were the most popular investment options for many years, today, you can choose to invest in shares, cryptocurrencies, mutual funds, insurance-cum-saving plans, gold, and many other assets to generate returns. In this article, we will discuss two of the most popular investment vehicles – Mutual Funds and ULIPs and highlight the difference between ULIP and Mutual Fund.
What are Mutual Funds?
Asset Management Companies (AMCs) collect money from numerous investors that have similar investment preferences. This collected corpus is then invested in various securities and each investor is allotted units that can be redeemed or traded as per the investor’s needs. AMCs launch numerous schemes with varying risk levels and investment objectives. Investors choose schemes that are in sync with their financial goals and risk levels.
What are ULIPs?
Unit-Linked Insurance Plans (ULIPs) are life insurance plans that save a part of the premium paid by you in a range of investment vehicles. Hence, you get the coverage of a life insurance policy along with an opportunity to earn returns.
ULIP Plan vs Mutual Fund
To help you choose the right investment for your needs, here is a quick look at the comparison between ULIP and Mutual Fund:
|
ULIP |
Mutual Funds |
Purpose |
This is a life insurance policy with the additional benefit of offering returns via market-linked investments.
|
This is a sole investment product that allows you to generate returns based on its underlying assets. |
Mutual Funds vs ULIPs tax benefits |
ULIPs offer tax* deduction under Section 80C of the Income Tax* Act, 1961
|
ELSS Mutual Fund Schemes are the only ones that offer tax* benefits (under Section 80C of the Income Tax* Act, 1961)
|
ULIP vs Mutual Fund charges |
ULIPs generally charge more than mutual funds since they have to manage a life insurance plan and an investment portfolio. |
The SEBI has capped the expense ratio of a mutual fund at 2.5%. |
Lock-in period – ULIP vs Mutual Fund |
ULIPs usually have a lock-in of 5 years. |
Most mutual funds do not have a lock-in period except for ELSS schemes that have a lock-in of 3 years. |
Who should opt for it? |
Ideal for investors looking to purchase a life insurance policy and earn returns at the same time |
Ideal for investors looking to invest in a basket of securities as opposed to buying them separately. Available across various risk profiles. |
How to Choose Between ULIP and Mutual Fund?
Choosing between a Mutual Fund and ULIP Insurance should depend on the financial needs of the individual. Before making any investment, it is important to think about your financial goals, risk tolerance, and liquidity requirements from the investment.
If you are looking for an investment plan that offers high liquidity, then opting for a mutual fund is a better option since ULIPs have a mandatory lock-in period and except for ELSS schemes, most mutual funds do not have any lock-in. However, if you are looking to buy a life insurance policy and simultaneous wealth generation, then buying a ULIP is a better option.
L&C/Advt/2022/Aug/1843
