There are various investment options available which help you accumulate wealth over time. You need to invest in those options that have the potential to offer high returns for your long-term financial security. We have covered the following in this article:
1. ULIPs vs Mutual Funds- Which is a Better Bet?
There are certain life events when you require a substantial sum. These can be purchasing or building a house, higher education and marriage of your children, and retired life. Considering the inflation rate, you must identify the avenues where your investment will generate the highest returns as per your risk profile.
Stock market investment has the potential to provide the highest returns among all investment options, but the risk involved is reasonably high. There are various channels through which you can invest money in the equity markets while balancing your long-term goals. Two of the most popular options among investors are 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 money from individual and institutional investors having a common objective is pooled together to invest in a variety of equity and debt instruments. Mutual funds are managed by 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, and the risk factor.
3. What are ULIPs?
ULIPs are amongst the latest financial products introduced for investors. Unit-Linked Insurance Plans (ULIPs) are insurance policies that offer investors an insurance cover while generating returns based on investments in various avenues. The insurance company floats a new scheme in a similar way to mutual funds and invites investors. ULIPs invest in equity shares, debt instruments, and bonds.
4. Difference between Mutual Funds and ULIPs
At first sight, these two options might seem identical, but they are not. There are several differences between these two investment options. The following are some of the significant difference between ULIPs and mutual funds:
(i) Return on investment
The returns from ULIP are on the lower side. The reason being, ULIPs promise a fixed sum whether or not the investment plan makes money. In comparison, the returns from mutual funds vary depending on the risk factor. Equity mutual funds have the potential to offer higher returns, while debt mutual funds 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 redeemed. ULIPs have a lock-in period ranging between three to five years, depending on the nature and structure of the investment scheme. Mutual funds generally have a lock-in period of one year, but in some cases, like ELSS, the lock-in period is 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 open about the fee charged and the holding in the portfolio.
(iv) Taxation Benefits
Investment in ULIPs is eligible for Income Tax deduction under Section 80C of the Income Tax Act, 1961, i.e. you can claim tax deductions of up to Rs.1.5 lakh a year on your ULIPs investment. Whereas mutual funds offer a tax deduction only against investment in ELSS. Investing in any other mutual fund scheme will not provide tax deductions and redemption of are subject to taxation as per the applicable tax bracket.
Mutual funds offer the benefit of low costs 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 assured to the family in case the policyholder dies within the term of the policy. However, 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 if required.
Ideally, mutual funds are suitable when you have the following:
(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.
5. Which ULIP Is Ideal for You?
(i) You are looking for a long-term investment horizon.
(ii) You want a life-cover built-in with your investment.
(iii) You have a low to 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 before finalising.