There are various investment options available in the market to help you make your money work for you. It is essential for you to invest your money in high-return productive investments for your long-term financial security.
1. ULIPs vs. Mutual Fund- Which is a better bet?
There are certain important events in life for which you will need a substantial sum of money such as buying a home, the higher education of your child, marriage of your child or for your life after retirement. Considering the ever-increasing inflation rate, you must identify the avenues where your investment will generate the highest returns as per your given risk appetite.
Investing in stocks is widely regarded as the best way to earn high returns on your investment. There are various channels through which you can invest money in the equity market while balancing your long-term goals — two of the most popular options being Mutual Funds and ULIPs.
2. What are Mutual Funds?
Mutual funds are one of the most popular investment options today. They are primarily a trust wherein the money from different investors is pooled together and then invested in various investment instruments. Mutual funds are managed by dedicated fund managers who make investment decisions on behalf of the investors. Mutual funds are of various types and are identified based on different parameters such as the type of market, the duration, risk-factor, etc.
3. What are ULIPs?
ULIPs are amongst the latest financial products introduced for investors. Unit-Linked Insurance Plans (ULIP) are insurance policies that offer investors an insurance cover as well generate returns based on the investments in various avenues. The insurance company floats a new scheme in a similar way to mutual funds and invites investors to invest their money in the scheme. The money is then invested in equity shares, debt instruments, bonds, etc.
4. Difference between Mutual Funds and ULIPs
At first sight, these two options might seem identical to you, but they are not. There are several differences between these two investment avenues which have been explained below:
(i) Return on investment
The returns from ULIP are on the lower side. The reason being, ULIPs have to promise an assured sum whether or not the investment plan makes money. In comparison, the returns from mutual funds vary depending on the risk factor. Mutual funds with a higher equity exposure have the potential for higher returns while mutual funds with debt-market exposure offer slightly lower returns.
(ii) Lock-in Period
ULIP essentially is an insurance product. Therefore, insurance companies define the lock-in period for such an investment before which the investment cannot be liquidated. ULIPs have a lock-in period ranging between 3-5 years depending on the nature and structure of the scheme. Mutual funds generally have a lock-in period of one year but in some cases, like ELSS, the lock-in period extends to three years.
ULIPs are highly sophisticated products which offer a mix of risk cover and investment. These have a less transparent structure concerning the underlying expenses and asset allocation. Mutual funds are relatively transparent about the fees charged and the portfolio holdings.
(iv) Taxation Benefits
Investment in ULIPs is eligible for Income Tax deduction U/s 80C of the Income Tax, i.e. you can claim a deduction of up to Rs. 1.50 lakhs on your investment in ULIPs. Whereas mutual funds offer a tax deduction only against investment in ELSS. Investment in any other mutual fund scheme is liable for taxation as per the applicable tax bracket.
Mutual funds offer the benefit of low expenses and professional management. SEBI has capped the expense ratio on mutual funds to 1.05% while there is no such limit for ULIPs. The charges for ULIP schemes can go much higher than mutual funds.
(vi) Risk Cover
ULIPs come with an in-built insurance plan that offers the sum insured to your family in case of the policyholder’s death. But in the case of mutual funds, there is no risk cover by way of insurance. You need to buy a separate insurance plan and pay an additional premium for the same.
5. Ideally, mutual funds are suitable when you have: –
(i) A short-term or a medium-term investment horizon
(ii) Have a term insurance plan already in place
(iii) Want high liquidity
(iv) Have a high or medium risk appetite.
6. ULIP is suitable for you if: –
(i) You are looking for a long-term investment horizon
(ii) You want a life-cover inbuilt with your investment
(iii) You have a low to a medium risk appetite
(iv) You want to save on your taxes
The decision as to which investment scheme you should choose depends on the answer to the questions mentioned above. Never rush into taking any investment decision; exercise due diligence and research well before finalising.