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

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.
 

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.