ULIP vs Mutual Funds: Similarities & differences
When it comes to diversified market-linked investment avenues which promise attractive returns while at the same time diversifying risks, ULIPs and mutual funds are spoken in the same breath. Both these investment avenues invest your money in market-linked funds helping you to earn market-linked returns. But then the important question arises – which one is better?
Let’s analyse ULIP vs Mutual Funds:
An overview of ULIPs:
ULIPs stands for Unit Linked Insurance Plans. These plans offer you investment options as well as insurance cover. You can choose the amount of premium that you want to pay, premium paying tenure as well as the policy tenure. Based on these parameters, your sum assured would be calculated. The premiums that you pay would be invested in a fund available under the plan. You have control over the choice of fund you want to invest your premium.
You have the option to choose one or multiple funds from the ones available. Thereafter, the premiums are directed to the selected fund(s) as per your choice. The investment grows as per the performance of the portfolio of the selected fund.
In case of death of the life insured during the term of the plan, either the higher of the promised sum assured or the fund value or both are paid. If the plan matures, the fund value is paid to the policyholder and the policy terminates. There are other options and variants of ULIPs available as well.
An overview of Mutual Funds:
Mutual funds are market-linked investment tools which collect investments from multiple investors and create a corpus. This corpus is then invested in different stocks and securities as per the objective of the fund. For instance, debt mutual funds invest 65% or more of their corpus in debt related instruments while in equity funds equity is the primary investment. Thereafter, the value of the portfolio of the scheme grows as per the performance of the stocks into which the scheme invested. You can redeem your investments anytime except in case of ELSS (Equity Linked Savings Scheme) where the lock-in period is 3 years.
ULIP vs Mutual Funds:
Here is a comparative analysis: ULIP vs Mutual Fund investments –
| Differences | ULIPs | Mutual Funds |
| Benefits offered | ULIPs offer both investment and insurance | Mutual Funds offer only investment |
| Risk Cover | ULIPs have a risk cover for the investment amount | Mutual Funds do not have any insurance for the same |
| Mode of investment | In ULIPs, Premiums can be paid throughout the term of the plan, for a limited duration or at once | Mutual Fund Investments can be done in one lump sum or in monthly instalments through SIP (Systematic Investment Plan) |
| Liquidity / Lock-in | In ULIPs, Once the policy is bought there is a lock-in period of 5 years. The policy cannot be surrendered during this lock-in period. Partial withdrawals are also not allowed during this period | In Mutual Fund investment, it is completely liquid. You can withdraw partially or fully any time that you want. Only under ELSS schemes, there is a lock-in period of 3 years during which there can be no withdrawals or redemption |
| Transparency | ULIPs have a complex structure and hence the structure is not completely transparent. They have a less transparent structure of the entire asset allocation and the stock holding of the fund | Mutual Funds have a transparent structure of the expenses and the holding structure |
| Tax Advantage | On investment- In ULIPs, the premiums paid are allowed as a deduction up to INR 1.5 lakhs under section 80C.
Maturity- The maturity or death benefit received, partial withdrawals and surrender benefits are all tax-free in your hands under section 10(10)D. |
On investment- In Mutual Fund Investments only ELSS schemes qualify for deduction under Section 80C up to INR 1.5 lakhs. Other Mutual Funds have no tax deduction on investment.
Returns- Returns earned are taxable in most instances depending on the type of investment you have done. |
| Types | ULIPs can be offered as children plans, pension plans or pure investment plans | Mutual funds come under different types like equity funds, debt funds, balanced funds, liquid funds, etc. |
| Investment Options | ULIPs have equity, debt, liquid as well as balanced fund options to choose from | Each Mutual Fund has a specific investment objective and the investment ranges from liquid to debt to balanced to equity options. An investor needs to choose the scheme based on his risk appetite |
| Risk profile | ULIPs have a range of fund options under them from equity to debt. You can invest in a mix of funds as per your risk profile. You can invest in both debt and equity funds under the same plan as per your risk appetite. ULIPs, therefore, have lower investment risks | In Mutual Fund Investments, the risk profile of a mutual fund scheme depends on the type of fund you choose. Equity funds have very high risks while debt funds have very low risks. Balanced funds have moderate risks. You would have to choose different mutual fund schemes to invest as per your varying risk profile. |
| Returns | In ULIPs, the returns depend on the performance of the fund into which you have invested. Fund performance, in turn, depends on the performance of the capital market. Nowadays, in many ULIPs, loyalty additions, wealth boosters, etc. are added besides market-linked returns. This ensures higher returns on your investments | Mutual fund returns also depend on the performance of the capital market. However, there are no wealth boosters or loyalty additions added to the fund value like in case of ULIPs. |
| Charges involved | Investments in ULIPs are subject to a range of charges like allocation fee, administration fee, fund management charge, mortality charge, etc. These charges increase the total charge deducted from the fund value | In Mutual Funds, the charges are lower than ULIPs. They are capped at a specified level by the capital market regulator SEBI |
| The facility of additional coverage benefits | ULIPs allow you to enhance your coverage benefit through riders | In Mutual Fund Investments, there are no riders available |
| Switching and its tax implication | In a ULIP, you can switch between the available fund options as and when you want. This switching is free of cost up to a specified level. Moreover, when you switch, there is no tax implication on the amount switched as you do not withdraw from your investments. There is no long term or short term capital gain taxation on switching |
In Mutual Fund Investments, if you want to switch, you would have to withdraw from your chosen mutual fund scheme and then invest in another. Withdrawal from the scheme would be considered as redemption and it would attract capital gains tax Thus, to switch between mutual fund schemes, you need to consider taxation as well as exit loads before executing |
Which one to choose: ULIP vs mutual fund?
Both ULIPs and mutual funds have their respective pros and cons. The ideal choice would, therefore, depend on your requirements.
ULIP vs Mutual Fund: When to invest in ULIP?
ULIPs would be a good choice in the following instances –
- If you want to create a good corpus over a long term period
- If you have a dynamic risk appetite and would want to actively manage your investments through switching as per your changing risk profile
- If you need insurance cover for creating financial security for your family
- If you want to save taxes on your investments as well as the benefits received
ULIP vs Mutual Fund: When to invest in Mutual Fund?
On the other hand, mutual funds would be a better bet in the following cases –
- If you need easy liquidity from your investments
- If you have a high-risk appetite and don’t mind staying invested in volatile market conditions
- If you have a term insurance plan for your insurance needs and you want to maximise your wealth through investments
- If you want to get lower charges on your investments
- If you don’t mind paying capital gains tax on the returns earned from your mutual fund investments
Questions to be asked before investing:
The above-mentioned circumstances tell you when to invest in ULIPs and when to invest in mutual funds. Whichever you choose, there are a few questions which you should ask before you invest. Investing in either ULIPs or mutual funds should be done only when you get sufficient answers for the following questions –
- What is the amount of investment required?
- For how long would you be able to invest?
- What is your risk profile?
- What are the historical returns yielded by the ULIPs or mutual fund schemes?
- What are the charges which would be deducted from your investments?
- Would the investment, ULIPs or mutual funds, create the financial corpus required for your financial goal?
- What would be the tax implications of investment done and returns earned from the schemes?
- How can you manage your investments when the capital market becomes volatile?
- What are the arrangements for premature closure of the scheme?
Assess ULIPs vs mutual funds based on these questions and then invest in either or both of the schemes as per your suitability.
A systematic way to invest in both: ULIPs vs mutual funds
While both ULIPs and mutual funds have their respective pros and cons, they prove to be good investment avenues. You can, in fact, balance the benefits of both these investment options and include them in your financial portfolio. So, to enjoy the benefits of both ULIPs and mutual funds here’s what you can do –
- Choose ULIPs for your life goals
Specific life goals like child planning and retirement planning can be planned through ULIPs. You can invest in a child ULIP plan or a pension ULIP plan for these goals. A child ULIP plan would ensure a financial corpus even in case of your premature death and would, therefore, create funds for your child’s future. A pension ULIP, on the other hand, would create an inflation-adjusted corpus which would pay your lifelong income after you retire. So, take care of these financial goals with ULIPs and also enjoy tax benefits on your investments and returns.
- Buy term insurance for coverage needs
Though ULIPs provide life insurance coverage, the coverage might not prove sufficient given the rising trend of inflation. So, invest in a term insurance plan with a high sum assured at lower premiums. The plan would fulfil your insurance protection needs and create a financial corpus for your family in your absence.
- Choose mutual funds for investment returns
Once your financial goals and protection needs are taken care of, you can choose mutual fund schemes for wealth maximization. Choose a scheme based on your risk appetite. Invest in ELSS schemes to get tax benefits on your investments. Choose SIPs for regular investments in a disciplined manner. If you invest in mutual funds over a long term horizon, you would get attractive returns.
ULIPs and mutual funds can, therefore, be used together to create a diversified and tax-efficient financial portfolio which also yields good returns.
So, when choosing the preferred investment avenue, understand the differences between ULIP vs mutual funds. Then, based on your suitability, choose the most relevant investment avenue for your investment needs and build up a good corpus. You can see the entire range of ULIPs on https://www.turtlemint.com/life-insurance and then choose the one which best suits your needs.
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