ULIP vs Mutual Funds: Things an Investor Should Know

A Brief Overview

Investors seek to invest their money in varied investment tools keeping in mind their investment goals which can differ. Unit Linked Insurance Plans (or ULIPs) and Mutual Funds are two such investment tools that have been explored below.

Understanding ULIPs

ULIPs cater to both the insurance and investment goals of their policyholder and allow for wealth creation over expansive stretches of time. Long-term financial goals including a child’s education or marriage fund can be fulfilled with investments made in a ULIP. Plan holders are expected to pay premiums at regular intervals (weekly, monthly, quarterly or yearly) in order to invest in ULIPs. Premiums paid are invested in several tools including stocks and bonds. The performance of the market is capable of altering the value associated with the fund. Upon maturity, the policyholders are paid the fund value. Else, if they die by the time the policy matures, the sum assured or fund value is paid to their beneficiary based on which is higher.

Understanding Mutual Funds

Mutual fund plans allow individuals to invest their money in a tax-saving mutual fund wherein the premiums invested are of varied securities ranging from bonds and stocks to money market instruments and so on. The performance of a mutual fund is congruent with the performance of the underlying securities.

ULIPs vs Mutual Funds

• Tax norms – Returns generated via ULIPs are tax-free under Section 10 (10 D) of the Income Tax Act. Long-term capital gains and short-term capital gains are levied on mutual funds which vary based on the type of securities that underlie the funds.
• Lock-in period – ULIPs are governed with a lock-in period that ordinarily amounts to five years and investors cannot redeem their investments prior to this time. Mutual funds in comparison are ordinarily open-ended and don’t have lock-in periods barring ELSS funds whose lock-in period amounts to 3 years.
• Charges – ULIP has a high entry load in the early stages as there is a fund management charge in addition to insurance premiums expected to be paid. Mutual funds also incur professional management fees however, they also charge operational fees which are collectively called expense ratios.
• The ideal time to invest – Mutual funds are ideal investments for those looking to fulfill short or long-term goals, build wealth, or generate reasonable returns on investments. ULIPs make sense for those looking for a tax-saving investment, a life insurance policy, and have a long-term horizon.
• ROIs- Returns on ULIPs can be wide in their spectrum as they are based on investments made in equity, debt, or a combination of the two. Mutual funds generate returns on investments that are dependent on the type of scheme selected and the return can range from one that is low to one that is high. Mutual funds don’t guarantee a minimum return.

Conclusion

Investors must assess their financial profile and goals prior to investing in a given investment plan. Finserv MARKETS serves as the perfect place to pursue investment plans currently on offer in India.