We live in a world where there are several investment options available that help you in accumulating wealth and securing your financial future over time. For investors aiming to build long-term wealth, ULIPs (Unit Linked Insurance Plans) and Mutual Funds are both appealing investment vehicles. However, comparing Mutual Funds to ULIPs is like comparing apples to oranges.
Over the years, there have been significant changes in how investments are made. There was a time when stocks were exchanged in small quantities under trees in Mumbai. However, in today’s time, stocks and other financial products are available and easily accessible online. Depending on your needs, constraints, financial goals, you can choose from any of these financial tools to either protect or increase your wealth. However, determining which one is the most beneficial for you might be difficult.
When you’re planning to invest in a particular financial tool, you will need to understand your financial goals and limitations. The more you’re invested in it, the more you will generate wealth.
In this article, we will be covering one of the most important questions that you may have – ULIPs vs Mutual Funds – Which is a better choice for you? Which one gives you better returns? We will understand what ULIPs and Mutual Funds are and, how they can be beneficial and where you should be investing.
What are Mutual Funds?
Mutual Funds are one of the most popular investment options today. Simply put, when a trust collects money from individuals and institutional investors with the common objective of growing wealth and then invests that money in a variety of instruments, including equity and debt, with the help of a fund manager. Each investor, individual or institutional investor; then represents a portion of that investment or the mutual fund. The income or the gains generated from this collective investment is divided/distributed proportionately with the investors keeping the expenses incurred during the process.
Mutual funds are the most beneficial for you if you aim at receiving higher returns and have a term insurance plan. Furthermore, you also need to identify the different risks associated with it. There are different types of mutual funds available in the market based on the asset class. These include Equity Funds, Debt Funds, Money Market Funds, Hybrid Funds, Interval Funds and more. Each of these funds helps you invest in different asset classes like stocks, bonds, securities among others. There are also funds that cater to specific financial goals that you could have, like retirement planning, liquid income, tax-saving, chasing aggressive growth and others.
Depending on your requirement, you can either invest in mutual funds through a SIP or through the lump sum amount. This decision depends mostly on your financial abilities, whether you would like to space out your payments at regular intervals or complete it in one shot.
What are ULIPs?
ULIPs are one of the modern financial investment tools available to investors to grow their wealth. ULIPs stands for Unit-linked Insurance Plans. These are a kind of insurance policies that offers dual benefits to the policyholder – an insurance cover for the policy duration as well as wealth generation by investing money into various equity, debt instruments and bonds. You benefit from investing in different asset classes through which you generate wealth in long term.
Just like the Mutual Funds companies or trusts pool in money from various investors and in-return provide insurance cover and wealth growth.
Difference between Mutual Funds and ULIPs
If you’re looking for long-term benefits, especially in terms of a retirement fund, you should consider investing in ULIPs. While both mutual funds and ULIP are popular, they have certain benefits to serve.
Some of the common factors causing differences between the two include:
- Return on Investment
The return-on-investment plans is an important factor to consider no matter where you invest. When comparing the two, ULIP seems to have lesser risk than mutual funds.
This is mostly because, in the case of mutual funds, the investors are betting their money on the stock market. Depending on the functioning of the stock market, you will be able to generate returns.
The risk in ULIP is much lower than in the equity mutual fund. This is because you have a bouquet of fund options to choose from while investing. And in many ULIP plans, you can switch between these funds whenever you want. You also can avail the services of a financial expert, who will suggest where you should invest your money.
When you’re investing somewhere, you want to maintain complete transparency. ULIP investment is a combination of two- portfolio allocation and risk management, along with life cover. This means double number of details you need to look into. You have the option of carrying out investments through a fund manager, but in the end, you will still have to be vigilant and up to date with your investment details.
Unlike ULIPs which offer dual benefits, here you only must look into one aspect.
- Risk Cover
When you choose ULIP, you will receive an in-built insurance plan that provides a wide range of benefits. In case the ULIP policyholder faces any unforeseen circumstances, their nominee will receive a payout from this plan. On the other hand, there are no risks covered.
Some of the common situations when you should invest in mutual funds include the following:
- Your investment horizon is quite broad, ranging from short to long.
- You have a life insurance plans.
- You want to receive higher liquidity for your investments.
You are compatible with the different levels of risks.
- Lock-in period
Many consider understanding the lock-in period for extensive benefits. The insurance company usually provides complete information regarding the lock-in period.
The lock-in period can range from three to five years, depending on the type of scheme you want to invest in. During this period, you will not be able to redeem your investment. Compared to ULIPs, the lock-in period of mutual funds is smaller.
Nonetheless, the mutual funds also have a varying structure similar to ELSS. If you’re opting for equity-linked saving schemes, the lock-in period can range up to three years.
- Tax Benefits Offered
The tax benefits are offered by Section 80C under the Income Tax Act, 1961.
In the case of mutual fund investments, you will be eligible for only a one-time exemption only if you invest in an ELSS scheme. However, as per the tax bracket, you will be eligible for different kinds of investment fund deductions. For example, if you have invested in Equity Funds for less than a year, then your gains will be taxed at 15%. But if you are investing in Equity Mutual Funds for more than a year your gains are fully exempted from Capital Gains Tax.
ULIPs on the other hand offer a dual tax benefit. The premium you pay can be taken as a tax deductible under Section 80 (C) of the Income Tax Act of 1961, and the maturity/death benefit is tax-free as per Section 10 (10D).
The expenses are an important factor to consider. In terms of mutual funds, you will be eligible for receiving professional investment management and low investment cost. The expense ratio is an essential factor to consider, and the charges will be significantly higher. Therefore, you will need to choose one accordingly.
In ULIPs, there are a number of expenses you will have to contend with. Some of these include the premium allocation charge, administration charges, fund management charges, rider charges and more. You should carry out a thorough comparison of expenses between ULIPs and Mutual Funds before starting to invest.
Both ULIP and mutual funds have their own pros and cons. Mutual funds do not have any guarantee. As highlighted in the article above, there are a number of differences in the way Mutual Funds and ULIPs operate; each of them has their own set of requirements. You should first take stock of the needs of you and your loved ones. Depending on your goals, start investing in these financial tools. But if you find confusion in where your money should go, don’t worry! You can always get in touch with the financial experts at Edelweiss Tokio Life. They will understand your financial needs and help you craft an investment plan accordingly. Visit the website today to get started.