ULIP and Mutual Funds! Which one to Choose?

As the end of the financial year approaches, most of the discussions of salaried and self-employed individuals are focused on Tax and tax savings instruments. On all forums available that is while commuting or in friendly gatherings, saving tax is a hot topic.

One of the popular investment avenues for saving tax is Life Insurance policies and Tax saving Mutual funds. ULIPs are type of Life Insurance policies where the monies are invested in units of stock, thereby participating in the growth of the value of the shares. So, the discussion moves to comparing between Tax Saving Mutual Fund and ULIP. The Sections 80C and 80D of the Income Tax Act, 1961 are popular among taxpayers as it allows to reduce taxable income up to a maximum deduction of ₹2 lakh by making tax-saving investments.

We will compare tax saving Mutual Fund investment with ULIP policies.

WHAT ARE MUTUAL FUNDS?

Funds from various individuals and institutions are pooled together in a Mutual fund Company and the Mutual Fund Company invests the amount in the stock market in various market-linked funds. A financial expert manages these pooled investments called a fund manager. The primary objective of the fund manager is to provide optimum returns to his/her investors. This is an excellent way to invest in an expert-managed portfolio. 

A few highlights of investing in mutual funds are:

  • Investors can redeem the fund units at any time (ELSS/ tax saving MFs have minimum 3 years of lock in).
  • Mutual funds allow investors to build a diversified portfolio, thus, reducing the risk involved when investing in market-linked funds.
  • The investment portfolio is entirely managed by a financial expert, a `fund manager`.

WHAT ARE ULIPS?

A Unit-Linked Insurance Plan, or ULIP, is a unique offering that allows you to avail the benefits of both investments as well as a life insurance cover under a single plan. A part of the premium paid is used for life coverage, and, at the same time, the rest is invested in different types of market instruments such as stocks and bonds.

A few benefits of investing in ULIPs are as follows:

  • It provides the dual benefit of investment and life insurance cover.
  • Allows investors to achieve their future financial goals easily as the policy provides a five-year lock-in period.
  • Allows you to partially withdraw from the investment after completion of the lock-in period.
  • Allows growth as it is linked to the stock market.

It offers several tax benefits under the old regime income tax structure (From 1st feb`2021, the government sought to tax capital gains from ULIPs with an annual premium of above ₹2.5 lakh and there are changes in section 10(10D)).

Insights on ULIPs & Mutual Funds

For understanding the differences between ULIPs and Mutual Fund investments we will look at the following table: 

 

ULIP                    

Mutual Fund

Purpose

ULIP is an investment instrument which offers insurance with growth

Mutual Fund is a Pure investment product that offers the sole benefit of creating wealth

Risk Cover

ULIP offers Life insurance cover

No Cover is offered.

Lock-in

ULIP policies have a lock-in of 5 years

ELSS (the tax savings Plan) has a lock-in of 5 years

Term

Long-term

Short-term, medium-term, or long-term depending on one’s financial goals

Tax Benefit

Premiums paid are exempt from income tax under section 80 C and Sec 10(10)D

ELSS contributions are covered under sec 80C of income tax. (No other schemes are having benefit of Tax saving)

Regulatory body

Insurance Regulatory and Development Authority of India (IRDAI)

Securities and Exchange Board of India (SEBI)

Investment

Some portion of the premium paid is deducted towards Insurance premium

Entire amount of subscription is converted in units

Expenses

Premium Allocation Charge, Fund Management Charge, Administration Charge, Mortality Charge

Professional Management fee, Operational Fee, Distribution fees, Exit load

Fund Management Charges

0.0125

0.025

A sound investment strategy allows you to build wealth over time. Your goals, whether long term or short term should be kept in mind while deciding on the investment option which you will exercise. Your risk appetite also plays a role in this decision.

Mutual funds have been popular in the financial market for a long-term wealth creation for a long time. Unit Linked Insurance Plans (ULIPs) have proved themselves to be an equally worthy option to safeguard your wealth as well as higher gains along with insurance.

While both ULIPs and mutual funds have their respective advantages and disadvantages, it is up to the individual to decide in which financial product to invest.

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