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© 2021 KlarifyLife. All rights reserved.
Disclaimer:
In this policy, the investment risk in the investment portfolio is borne by the policyholder. The Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Linked Insurance Products completely or partially till the end of fifth year.
When it comes to growing your wealth and securing your financial future, understanding whether there is a concept of ULIP vs. mutual funds is essential. Unit linked insurance plans (ULIPs) provide the dual benefits of life insurance coverage and investment opportunities, making them an attractive option for those seeking both protection and growth. On the other hand, mutual funds focus exclusively on investment, offering a wide range of options to suit various risk profiles. In this blog, we’ll explore the key features and benefits of each to see which one aligns better with your financial goals.
What is ULIP?
Unit linked insurance plans, popularly known as ULIPs, enable policyholders to create wealth over the long term while providing a term insurance cover to secure their family's financial future.
When you pay a premium towards your ULIP, you have the flexibility to decide how much of it goes towards the insurance cover and how much is invested. For example, if you choose to pay a monthly premium of ₹10,000, you might allocate ₹3,000 towards the life insurance component and ₹7,000 towards investments. As a policyholder, you can select from a variety of investment options, including equity, debt, and hybrid funds, based on your risk appetite and financial goals.
Moreover, ULIPs offer the flexibility to switch between these funds throughout the policy term, allowing you to adjust your investment strategy in response to changing market conditions or personal financial objectives. ULIPs also provide the facility of partial withdrawal; that is, you can make partial withdrawals from your investment before the maturity time but after the lock-in period.
Exploring Mutual Funds
Mutual funds are an investment vehicle that helps one grow their savings without the need to select individual stocks or bonds themselves.
Think of a mutual fund as a big pot where money from many investors is pooled together and then invested in a mix of securities like stocks, bonds, and more. This pot is managed by an asset management company (AMC), which offers various mutual fund schemes tailored to different financial goals, whether you're saving for a dream vacation, your next home, or building a retirement nest.
For example, if you invest ₹10,000 in a mutual fund through a systematic investment plan (SIP), the AMC will regularly invest that amount in selected stocks and bonds on your behalf, helping you benefit from market growth over time. Alternatively, you can choose to invest a lump sum if you have a larger amount ready.
Key Differences Between Mutual Funds and ULIPs
While both ULIPs and mutual funds can help you achieve your long-term financial goals (such as buying your dream house or having a grand wedding for your child), there are some key differences between both:
A. Tax benefits
ULIP:
ULIPs can offer tax deductions* on premiums under the Income Tax Act, 1961. You can get tax deductions up to Rs. 1.5 lakh for the premiums you pay for your ULIP under Section 80C of the Act. Further, if you have any health-based riders (such as the critical illness rider) added to your ULIP, you can get an additional deduction for the premiums you pay for your ULIP under Section 80D of the act. What’s more, the life cover that your family receives when you pass away during the policy period is completely tax exempt under Section 10(10D) of the Income Tax Act, 1961.
Mutual Funds:
When it comes to tax benefits for mutual funds, only ELSS (Equity Linked Savings Scheme), which is a special type of equity scheme, is eligible for tax deductions under Section 80C of the Income Tax Act, 1961.
B. Return on Investment (ROI)
ULIP:
ULIPs have a life cover attached to them, ensuring that a portion of your premium provides essential insurance protection for your family. The remaining part of the premium is invested in various financial instruments, allowing you to build wealth over time. Since a fraction of the premium is allocated to investments and additional charges are applied, ULIPs typically offer lower returns on investment compared to mutual funds. However, if you see the value that you’re getting for the money you put in ULIPs, then they can be a great financial instrument as they offer a financial protection component as well. Further, there are some ULIPs that may offer 40x or 100x your income as your life cover.
Mutual Funds:
Unlike ULIPs, mutual funds are solely focused on investment, ensuring that every rupee you invest goes directly into the market. This dedicated investment strategy provides mutual funds with the potential for significant returns, often exceeding those offered by ULIPs. However, mutual funds do not provide any financial protection for your family.
C. Life Insurance Cover
ULIP:
ULIPs offer a life cover to protect the financial future of the family. The life cover is paid to your family if you pass away during the policy period of the ULIP. This life cover can help them overcome financial difficulties that may arise after your demise (such as loan repayment or maintaining their current lifestyle).
Mutual Funds:
While mutual funds can help you achieve your financial goals, they don’t offer the added security of life insurance;this means that if something unexpected happens to you, your family won’t receive a life cover payout from your mutual fund.
D. Lock-in
ULIP:
ULIPs come with a lock-in of 5 years, which means you can’t withdraw or make any partial withdrawals from your investment before this period. The way to see this lock-in period is that it is allowing you to follow a disciplined approach to your investment, that is, allowing your investment ample time to grow rather than giving it lesser time to grow.
Mutual Funds:
Except for ELSS and some solution-oriented funds, there is no lock-in in mutual funds, which means you can withdraw your investment whenever you want.
E. Risk
ULIP:
Generally, ULIPs have a lower risk than mutual funds because there is the life cover component that’s given if you pass away during the policy period.
Mutual Funds:
Mutual funds have more risk associated with them as you’re dependent only on your investments, as there is no life cover offered.
F. Goals
ULIP:
ULIPs are suited for those who want to secure the financial future of their family and also achieve long-term financial goals (such as building their dream home).
Mutual Funds:
These are purely oriented for investments and can cater to both long (such as building your dream home) and short-term goals (such as planning for a small vacation). Further, except for certain mutual fund types, others don’t have any lock-in.
G. Flexibility
ULIP:
ULIPs offer you the flexibility of switching between funds and also adding riders for enhanced coverage.
Mutual Funds:
Fund switch option is not possible in mutual funds. If an investor wants to switch their fund, they will have to liquidate the existing fund and put the money into a new fund. Upon liquidation, the returns may be taxed.
H. Costs
ULIP:
ULIP costs can go higher than mutual funds.
Mutual funds:
The costs can generally be lower than ULIPs.
Important Factors to Consider When Choosing Between ULIPs and Mutual Funds
While choosing between mutual funds, consider these factors:
1. Financial goals
2. Tax benefits
3. Risk
4. ROI
5. Costs
Both ULIPs and mutual funds are awesome financial tools that can help you reach your financial goals. Instead of getting caught up in which one is better, focus on what you want to achieve and the level of risk you're comfortable with. If you’re looking to get a life cover for your family and also want the option to grow your money, ULIPs may be the right pick for you. On the other hand, if you’re focused solely on growing your money, mutual funds might better suit your needs.
Ultimately, the right choice depends on what matters most to you, whether it's comprehensive coverage with your investment or focused growth for your wealth.
Comparing ULIPs and Mutual Funds: Is One Better Than The Other?|
Here’s a summarised comparison of mutual funds and ULIPs:
ULIPs |
Mutual Funds |
They aim to protect your family financially and create wealth
|
They aim to purely create wealth |
Regulatory body is Insurance Regulatory Development Authority of India (IRDAI)
|
Regulatory body is Securities and Exchanges Board of India (SEBI) |
Tax benefits can be availed for paid premiums and the life cover payout
|
Tax benefits can be availed for only ELSS funds |
There is a lock-in period of 5 years
|
Except for a few funds, there is no lock-in period |
Return on investment is generally lower than mutual funds
|
Return on investment is generally higher than ULIPs |
Life cover is offered
|
No life cover is offered here |
Costs are generally more than mutual funds
|
Costs are generally lesser than ULIPs |
Generally lower risk than mutual funds, thanks to availability of life cover
|
Generally, higher risk than ULIPs as returns are purely dependent on investment performance, there is no life cover present
|
Evaluating Returns and Risks: ULIPs and Mutual Funds
ULIPs offer the dual benefit of life cover for your family and a chance to grow your money. Thanks to the life cover, which will surely be paid if you pass away during the policy period, ULIPs have lower risk than mutual funds.
Mutual funds are purely investment vehicles, and their returns depend on the investment performance. Generally, their return of investment is also greater than ULIPs.
If you want to ensure your family is protected while also growing your money, ULIPs might be the right choice for you. However, if your main goal is to maximize your investment returns and you’re comfortable with taking on more risk, mutual funds could better suit your needs.
*Tax Disclaimer: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions and tax Laws are subject to change from time to time. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law
© 2021 KlarifyLife. All rights reserved.
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