ULIP vs mutual fund – Which one to opt for?

ULIP | Compare best ULIP - Features, Benefits, Returns | Coverfox

Creating wealth over a period of time and keeping yourself financially secured is the main objective of any investment strategy. Among many investment instruments that are available, mutual funds and Unit Linked Insurance Plans (ULIPs) are two popular avenues that investors can opt for depending on their financial goals and risk appetite.

What is a mutual fund?

A mutual fund is a pooled investment vehicle that is operated by an asset management company. Further, a fund manager, who usually has several years of experience in fund management, invests the pooled money in different financial products on your behalf. Each mutual fund is created with an objective; hence, if a mutual fund is created for small-cap equities, investors who are interested in the small-cap space only should invest in that fund.

What is ULIP?

ULIP is among the latest financial products structured for investors who want a mix of insurance as well as investment returns. If you want a life cover and your investment to grow, you could opt for a ULIP. ULIPs are offered by insurance companies, which pool money from investors similar to mutual funds and use that money to earn a return for investors and also to provide life cover to their policyholders.

Difference between ULIP and a mutual fund

  • The returns offered by mutual funds and ULIPs are both dependent on the market performance. Though these avenues do not have the assurance of guaranteed returns, they can provide attractive returns on investment, subject to market conditions. ULIPs invest in debt, equities, and a combination of different types of securities. In case of mutual funds, there are funds that invest in specific type of securities, and based on the scheme and the fund you invest in, you may get higher returns.
  • When it comes to ULIP vs mutual funds, the maturity amount of ULIPs is tax-free under Section 10 (10D) and the premiums paid are exempt from tax under Section 80C. Conversely, not all mutual funds are tax-free. Only investments in Equity Linked Savings Scheme (ELSS) give you tax benefits at the time of investment.
  • Mutual fund charges, known as expense ratio, are capped by the Securities and Exchange Board of India (SEBI). In case of ULIPs, there are various charges under different heads and these are regulated by Insurance Regulatory and Development Authority of India (IRDAI).

  • The lock in period for ULIPs is 5 years. In case of mutual funds, depending on the scheme you have opted for, there is generally no lock in period. However, investing in Equity Linked Savings Scheme (ELSS) comes with a lock in period of three years.

When to opt for ULIP? When to opt for mutual funds?

As an investor, choosing between ULIP and MF sshould be decided basis your financial goals. If your goal is to get an insurance cover along with growing your wealth, ULIPs could be the way to go. However, beware of the charges and fees. Also, many financial experts caution investors from mixing investments and insurance.

If your sole objective is wealth creation to fulfill financial goals, be it short-term or long-term, you can exploremutual fundsvia a financial expert who can curate personalized investment plans that are aligned with your appetite for risk and financial goals.

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