ULIP VS Mutual Funds

Last Updated: 9 Apr 2024

Investors are always looking for ways of investment that will help them accumulate wealth over time. Investing itself is relatively easy, but choosing where to invest is difficult. In this article, we’ll help you understand and differentiate between two very similar-looking investment options: the mutual funds, and the Unit Linked Insurance Policy or ULIP.

What is a mutual fund?

A mutual fund is an investment where funds from multiple investors are collected post which is invested in various financial instruments like equity, debt, and other fixed-income securities. Mutual funds are an excellent option for investors who do not want to invest wholly into the stock market directly but want a more balanced portfolio that invests in both high and low risk funds.

What is Unit Linked Insurance Plan?

It is a life insurance plan that provides life cover for its policyholder and in the event of his/her death, the nominee is paid the death benefit as a lump sum amount.

ULIP is not purely an insurance plan. It is a combined plan where a part of the premium goes into the life insurance component of the ULIP while the remaining part is invested very much like a mutual fund.

ULIP vs MF: All You Need To Know

Planning to go with the decision to invest sounds all promising. However, the biggest challenge that befalls any individual, whether they are a business owner or working employee, is to decide which option to go with.

Typically, there are two famous investments out there: mutual funds and Ulip.

In this article today, we will take a look at ULIP vs Mutual fund and help you decide which is the right option for you.

ULIP vs MF: Some key differences

• Life insurance

  The biggest difference between a ULIP and a mutual fund is that a ULIP provides a life insurance cover and a mutual fund does not. A mutual fund is a pure investment instrument and doesn’t provide life insurance.

• Lock-in period

  Since a ULIP offers life cover, there is usually a lock-in period of 3 to 5 years before which you cannot redeem your investment. Mutual funds do not have any lock-in period unless you have invested in an ELSS (Equity Linked Savings Scheme), which will have a minimum lock-in period of 3 years.

• Liquidity

  Liquidity is the ability of your investment to be converted into usable, liquid cash. Mutual funds are highly liquid, meanwhile, ULIP’s are not very liquid because of the lock-in period that comes with it.

• Taxation

  As far as saving on taxes is concerned, ULIPs are much more beneficial because the premiums are tax-deductible up to Rs. 1.5 lakh per annum according to Section 80C of the Income Tax Act. Mutual funds are not tax-deductible unless they fall under the ELSS or Equity Linked Savings Scheme.

• Expenses

  There are some expenses that you must incur both in ULIPs and mutual funds. These expenses can be more in the case of ULIPs like premium allocation charge, administration charge, fund management fees, mortality charges etc. Mutual funds only charge fund management fees and exit charges.

• Transparency

  When it comes to transparency of asset allocation and expenses, mutual funds are transparent in making this information available to the investor. ULIPs, are complex policies with both insurance and investment components and tend to be less transparent about hidden charges and asset allocation.

• Switching options

  With ULIP, switching between funds is very easily possible, and it assists in managing the risks. On the other hand, it is not at all possible to switch to mutual funds.

• Fund management charges

  There is also a significant difference between them when we talk about the charges of fund management. With ULIT, the fund management charges are around 1.35%. On the other hand, the charges for administering funds in Mutual funds is around 2.50%..

Factors to be Considered Before Choosing Between ULIP and Mutual Funds

Speaking of ULIP vs MF, here are some factors that an individual should consider while choosing one between them:

• Return on the investments
• Tax benefits that are available
• Involved risk coverage
• The scope of investment option
• During the time of making an investment, the flexibility which is offered to the investor.
• Transparency during the allocation of funds.

Wrapping Up

Yes, the long dialogue of investment and market risk that we notice on the disclaimer is important. However, your first priority should be understanding your requirements with your investment. It will help you boil down the decision for you.

Conclusion

It always boils down what your requirements are. If you want a long term investment option, are not worried about lock-in periods, and do not have an additional life insurance policy, then ULIP is the better choice. But, if you already have a life insurance plan in place, and are looking purely to invest for short term or long term gains, mutual funds are a viable option.