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What is the Difference Between Mutual Funds and ULIPs?

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

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

What is the difference between ULIP and MF?

Mutual funds are investment instruments that collect money from numerous investors having similar investment preferences. The collected fund is invested in equity, debt, or money market instruments to achieve the objective of the scheme. Each scheme defines a risk exposure level and asset allocation that it will follow to generate the targeted returns.

 

On the other hand, ULIPs are primarily life insurance plans that save a small portion of the premium amount into market-linked instruments. These plans offer a death benefit to the nominee of the policyholder.

What is better: MF or ULIP plans?

MF and ULIPs have their own benefits and features. You can choose the one depending on your own needs. ULIP can be an ideal choice for people as it offers the dual benefit of life insurance coverage and market-linked returns. 

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
  • IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER
  • THE LINKED INSURANCE PRODUCT DO NOT OFFER ANY LIQUIDITY DURING THE FIRST FIVE YEARS OF THE CONTRACT. THE POLICY HOLDER WILL NOT BE ABLE TO SURRENDER/WITHDRAW THE MONIES INVESTED IN LINKED INSURANCE PRODUCTS COMPLETELY OR PARTIALLY TILL THE END OF THE FIFTH YEAR.
  • Past performance is not indicative of future performance.
  • All investments made by the Company are subject to market risks. The Company does not guarantee any assured returns. The investment income and price may go down as well as up depending on several factors influencing the market.
  • Please make your own independent decision after consulting your financial or other professional advisor.