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Need assistance in choosing the right insurance plan? Get a call from our Expert.

Need assistance in choosing the right insurance plan?Get a call from our Expert.

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4G ULIP vs Mutual Fund – Where Should You Invest?

4G ULIP and mutual funds are financial securities that sustain individual financial goals. However, understanding the basic and different parameters of both, such as liquidity, cost, etc., helps in making wise decisions. Let’s learn about the same in detail.

Planning our finances and investment options is one of the crucial things. Earlier, people used to invest their savings in FDs and RDs, but now people go for investment options like trading, stocks, etc., that have high ROI. 
 

However, these are considered as risky assets. But with the advent of technology, we have diversified and tightly regulated investment options such as ULIP insurance and mutual funds.
 

Mutual funds and 4G ULIP are suitable options to secure a financial future for the long term. People often mix insurance schemes with investments. They differ from each other. Let's understand the difference between a ULIP plan and a mutual fund.

Understanding of ULIPs vs Mutual Funds

Stock market options are known to provide better returns, but they are considered high-risk elements. However, there are other low-risk options where individuals can invest their savings and income in equity options and meet their long-term goals. These two safest investment options are Unit-Linked Insurance Plans and mutual funds.
 

What are 4G ULIPs?

4G ULIPs, also known as 4th generation Unit-Linked Insurance Plans, are the ULIP type that provide investment and life coverage simultaneously. It is an insurance plan that provides market-linked growth returns rather than fixed sums and guaranteed returns. 
 

In the 4G ULIP plan, investors have options to customise their portfolios based on their preferences. Individuals can invest in multiple funds, such as equity, debt, etc., within the same policy.
 

In 4th generation ULIP, the premium is distributed into two parts: a part of the premium goes to life insurance cover while the rest is invested in financial instruments.
 

What are Mutual Funds?

Another popular investment option for long-term wealth is mutual funds. SEBI regulates these funds. In this, money is collected or pooled from various investors and invested in various financial instruments such as debt, equity, etc.
 

Mutual funds depend on various parameters such as risk factors, investment duration, and market type. Fund managers usually manage the funds invested in mutual funds since they have expertise in dealing with the volatility and complexity of the financial market. 
 

However, some of the mutual funds can be managed passively without the need for fund managers such as index funds.

Difference between ULIPs and Mutual Funds

When it comes to investment, people often consider both 4G ULIP and mutual funds the same; however, there are significant differences between these two investment options. Let's cast light on ULIP vs. mutual funds.
 

  • Investment Objective - The first difference between mutual funds and ULIPs is their objective. Mutual funds are created to create wealth and reasonable returns in the long term for individuals. ULIPs, on the other hand, is an insurance product with the added benefit of market-linked investment.

  • Lock-in Period - Another significant difference between 4G ULIP and mutual funds is their lock-in period. Since ULIP is primarily an insurance product offered by insurance providers, its lock-in period is decided;it cannot be redeemed before the lock-in period. Usually, the ULIP insurance lock-in period is between 3 to 5 years, based on the investment scheme. On the other hand, mutual funds don't have any lock-in period, especially open funds. In some cases, like ELSS funds, it usually comes with a lock-in limit of 3 years.

  • Return on investment - Further, ROI in the ULIP case can be dynamic as investment has been made on various funds such as equity, debt, etc. However, ROI on mutual funds cases depends on the risk factor and type of scheme.

  • Transparency - As per the new IRDAI guidelines, ULIPs provide upfront information on fund allocation, making it entirely transparent. Further, mutual funds are regulated by SEBI, and they made it clear to provide detailed reports of portfolio holding, active fund manager, fees charged, etc.

  • Risk Cover - Besides this, the risk factor is another significant difference between ULIP and mutual funds. Compared with mutual funds, ULIP is primarily an insurance coverage that offers an assured sum as per policy condition to family members in case the policyholder dies, making it suitable. However, mutual funds come with no risk coverage. To get risk coverage, you need to buy an insurance plan.

  • Taxation Benefits - Lastly, investment in ULIP insurance falls under Section 80C of ITA, 1961. Individuals can have taxation benefits on ULIP investment for up to 1.5 lakh annually. However, investments in mutual funds are applicable for tax deduction as per the tax bracket.
     

Comparison Table of ULIPs and Mutual Funds

Here is the detailed comparison table of mutual funds and ULIPs.
 

Parameters 

ULIP

Mutual Funds

Purpose

Long-term wealth and insurance coverage

Wealth creation

Regulatory Body

IRDAI

SEBI

Duration

Long term

Short, mid, and long based on the investor's choice.

Payment Mode 

Payment has to be made at regular intervals or lump sums.

SIP or lump sums can be employed for its payment.

Flexibility

Very flexible.

Less flexible

Management Expenses

Approximately 1.35%

Approximately 2.50%

Things to Consider Before Choosing Between ULIPs and Mutual Funds

It can be daunting to choose between ULIPs and mutual funds. It is best to deeply understand both before making any investment decisions. Below are some factors that help you choose between mutual funds and ULIP.
 

  • Scope - The first factor that helps you choose between ULIP and mutual funds is scope. A mutual fund is only an investment option, but ULIP is both an insurance and investment option. So, if you are looking for an option that can provide both benefits, ULIP is a sound choice.

  • Returns - Another factor to decide is returns. Mutual funds are volatile and offer higher returns, while in ULIPs, the returns are low, but beneficiaries can rely on life insurance coverage.

  • Flexibility - ULIPs are highly flexible compared to mutual funds in terms of investment. In this, individuals can decide what part of the investment will go to life insurance coverage and what will be invested in financial instruments based on market performance. Other than this, individuals can also switch funds based on market results. On the other hand, in mutual funds, investors have to decide whether they want to invest in equity funds or debt securities.

  • Expenses - Lastly, the expenses incurred in mutual funds are operational and professional management fees. On the other hand, for ULIPs, the charge incurred is administration charge, fund allocation charge, premium allocation charge, mortality charge, etc.

These factors can help you choose between ULIP and mutual funds. However, it is best to make a cautious decision and invest wisely with proper research and due diligence.

Conclusion

There is no particular answer when it comes to choosing between 4G ULIP and mutual funds. Both are good investment options, but it depends on investor choice and their financial goals. Not just this, individual investors need to pay attention to risk factors and duration before making investment decisions. Mutual funds are a good option if you are interested in liquid investment. But if you choose long-term wealth creation with insurance coverage, go with ULIP insurance.

Get Flexibility to Choose from 10+ Fund Options with our ULIP

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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!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Is ULIP tax-free after 5 years?

If the individual surrendered the policy before the lock-in period, it is subject to taxation. However, if the policy is redeemed after the completion of the lock-in period, then it is tax-free.

What are the expenses or charges incurred with 4G ULIPs and mutual funds?

Various charges are associated with 4G ULIP insurance, such as fund management, policy allocation, mortality, surrender charges, etc. Further, mutual funds have exit load, transaction, and expense ratio charges.

What is the ideal holding period for mutual funds?

The ideal holding period for any equity is 3 to 5 years in mutual funds.

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 the 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.

  • ULIP:

    • 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.