ULIPs vs. Mutual funds- what is better for you?

We are always on the lookout for avenues to help our money work for us. Many of us also have a decent working knowledge of what financial planning is. It is about striking a balance between the risk and the returns generating capability of the investment.When it comes to ULIP vs MF, both are hot commodities in the market, you are sure to be confused between the two. At first glance, the two financial instruments might seem identical, however, that is not the case. The difference between ULIP and mutual fund lies in their structure, purpose, and benefits, as explained below. Read on and decide what is best for you -

The profits from a ULIP plan are typically lesser; the reason being that ULIPs provide an assured sum to the subscriber, irrespective of whether the investment performs or not. Mutual funds, on the other hand, vary depending upon the market performance. Also, it depends on the choice of investment avenues. Funds with a higher equity exposure are known to perform better but come with added risk. However, choosing debt market investments exposes you to lesser risks but offers you slightly lower returns.

ULIP policy is primarily an insurance product, and hence it has a pre-defined period, within which you cannot liquidate or withdraw the accumulated funds. This lock-in period ranges from 3-5 years depending on the company and nature of the scheme. Mutual funds have a comparatively lower lock-in period ranging from 1 to 3 years.

ULIP plans are sophisticated financial instruments that offer a mix of insurance and investment. They have a comparatively lesser transparent structure concerning the expenses and the investment fund allocation. Mutual funds are more open regarding the funds in which you have invested as well as the costs.

Mutual funds are professionally managed. Thus they attract some service charges. SEBI has capped the expense ratio for mutual funds at 1.05%, however, there is no cap for ULIP plans. Also, since they have an additional life cover built within, the expenses of ULIP are typically higher.

ULIPs are by default insured that offers a payout to your nominee, in case of your death. Mutual funds are purely investment plans and do not provide any risk coverage. However, you can purchase an additional insurance plan for the same.

ULIPs are known for the tax benefits that they offer. You can claim a deduction of up to 1.5 lakhs on your investment in ULIPs under section 80C of the Indian Income tax Act. Where Mutual funds are concerned, you can avail deductions only for Equity Linked Savings Scheme (ELSS). Investing in any other type of mutual funds does not exempt you from paying taxes.

To truly decide “ULIP vs mutual fund which is better” for you, analyze your purpose, risk appetite, and financial goals before investing in any plan. You can even take the help of a financial advisor or your bank to know which financial avenues can work best for you.

New FAQs:

Q: Which is better ULIP or mutual funds?

A: It will be based on what you want to achieve. Mutual funds are pure wealth creation funds which can hold greater money and greater flexibility whereas ULIPs come with insurance benefits but have a lower ceiling on amount invested and returns.

Q: Benefits of ULIP over mutual funds

A; The Ulips offer life insurance cover and investment, have tax deductions under Section 80C, and also have a set long term approach to investing.

Q: Are ULIPs better than mutual funds?

A: ULIPs might be superior in case you need insurance and investment under the same scheme with tax advantage. Mutual funds may however be more appropriate to you in case you require greater levels of liquidity and not being insured in the case of market based returns.