An investment plan is said to be a good investment plan if it allows the investor to create wealth over time as well as keeps his/her family financially safeguarded in need of the hour. To attain this, people invest their hard-earned money in various investment vehicles. Mutual funds have ranked on top of this list for a long time with the majority of people opting for investment in mutual funds for steady wealth creation in the long term. But in recent times, Unit Linked Insurance Plans (ULIPs) have made its way giving competition to mutual funds. ULIPs keep the investor’s existing wealth safeguarded as well as creates some more.
Mutual funds are a single financial trust, which pools money from various investors in the market. The pooled money is then invested in different schemes and assets to reap good returns. Whereas on the other hand, ULIPs offer dual benefits of insurance and investment under a single plan. A part of the premium you pay towards ULIPs is invested in various funds like equity, balanced, or debt funds and the remaining part is diverted to the insurance cover.
From a general definition, the two options may sound similar, but they are quite different in terms of benefits they reap and the way they work. Now let’s see some of the significant differences between the two of the most popular options in the investment market that are mutual funds and ULIPs.
- Return on investment – The returns on investment from ULIPs are usually on the lower side. This is because it promises a fixed amount irrespective of the investment plan makes money or not. Whereas, returns on investment in mutual funds vary as it depends on the risks the investor agrees to take. Here equity funds have the highest potential to reap more returns, and debt funds have the lowest capacity to reap good returns as they carry less risk.
- Lock-in period – ULIPs being a blend of insurance and investment options, the insurance company gets to decide the lock-in period. This usually ranges from three to five years based on the nature and structure of the investment scheme you choose. On the other hand, mutual funds usually come with a lock-in period of one year. Only in some cases like ELSS scheme, the lock-in period is of there years.
- Transparency – Mutual funds are quite open when it comes to fee charges and holding in the portfolio. Whereas, ULIPs being the mix of investment and insurance products have a relatively less transparent structure when it comes to underlying expenses and allocation of assets.
- Tax benefits – Premiums paid to purchase ULIPs are eligible for tax deduction under Section 80C of the Income Tax Act, and you can claim up to ₹1.5 lakh a year. In case of mutual funds, tax deduction can be availed only in ELSS funds. Other mutual fund schemes do not offer any tax benefits.
- Expenses – Mutual funds offer professional management at a lower cost as SEBI has capped the expense ratio to 1.05%. There is no such limit levied on ULIPs. Thus, the charges are significantly higher.
- Risks covered – ULIPs having the benefit of insurance covers the family of investor/policyholder in case of untimely demise. But mutual funds being purely investment product does not cover the investor against any such risks.
Now you know the striking differences between ULIP and mutual funds, think well and make a decision that will reap you good returns without any stress.