ULIP vs Mutual Funds - Which is better?

by General Insurance Insurance

It is universally proved that investment brings more power to your money. If you are a person who spends recklessly in an extravagant way, then investing your money will allow you to develop discipline. It will also trim your spending habits by focusing on your budget and cutting expenses. Nowadays, there are two options that have proved victors in terms of investment i.e. ULIP and Mutual Funds. ULIP vs Mutual Fund which one is better is a decade old debate. Moreover, after the LTCG tax announcement in the Union Budget 2018, people are more in dilemma whether to choose ULIP or Mutual funds? This read will help you to get down to a conclusion and get the best one for you.

The following points will help you decide the investment tool you may opt for.

1)      Tax benefit

Most of us are aware that ULIP (Unit linked Insurance Plan) is a tax-free investment option. ULIP being an insurance product, its benefits payable are tax-free under section 10(10d) of the Income Tax Act, 1961. Whereas MFs as equity mutual funds, if held for less than a year, were taxed at 15% as short-term capital gains. Since LTCG tax has kicked in from 1st April, 2018, the mutual funds held for more than a year will be taxed at 10%. ULIPs will have a bigger advantage as they offer debt and liquid fund options to investors.

2)      Life cover

Let us take an example of two individuals i.e. Mr. Sharma and Mr. Khan. Here, both are looking for an investment option. Mr. Sharma invests in ULIP while Mr. Khan invests in Mutual Fund. A part of Mr. Sharma’s investment is taken every month as an insurance cover which will compensate to his family in case of his demise, whereas Mr. Khan will have to separately buy a life insurance policy. Therefore, ULIPs provide both investment as well as life cover component.

3)      Additional Protection

There are ULIP products that may offer you inbuilt riders and benefits. Unexpected circumstances can arise anytime in life, therefore, it is important to protect your loved ones’ future in case of your absence. Thus, a ULIP plan offers to pay a lump sum amount to your family in case of your untimely demise and take care of your family. Besides, the insurer may also continue to pay premium on your behalf, providing regular income to your family for the remaining policy tenure.

4)      Lock-in period

ULIP has a lock in period of straight 5 years, which may refrain the investor to not sell it before that time period. On the other hand, Mutual Funds do have lock-in period which are known as ‘closed funds or ELSS Funds with a 3-year lock-in period.

5)      Risk exposure

Since ULIP is an insurance product, they are supposedly less risky. However, Mutual Funds are riskier in nature.

6)      Charges

Mutual funds are chargeable for managing your money and for exit fee. And on the other hand, ULIPs charge you for the insurance premium, charges for managing your funds and administration charges. ULIPs are charged at 1.5% just for Fund Management Charges whereas Mutual Funds are charged at 2.5%. Also, as per the IRDAI guidelines, the total charges on ULIP should not exceed more than 2.5%.

7)      Liquidity

Mutual fund as a financial instrument are more liquid as one can exit at any point of time he wants. And with respect to ULIP there is a lock-in period, after which only one can make partial withdrawals. Although, it is always appropriate that one remains invested for longer period of time as the possibility of returns are even higher.

In short, if you are looking to invest in ULIP, you might belong to either of the below categories:

-          You are keen on saving tax under section 80C

-          You plan to invest more than 10 years

And if you are looking to invest in SIP, you might belong to the following category:

-          You are majorly looking for pure investment plans

-          You are ready to lock your SIP for a period of 3 years

Types of Mutual Funds in India

There are many types of Mutual Funds available in India depending on the basis of asset class, investment objective, and structure.

Following are the types of Mutual Funds based on Asset Class:

-          Debt funds

-          Money market funds

-          Hybrid or balanced Funds

-          Sector Funds

-          Index funds

-          Tax saving funds

Following are the type of Mutual Funds depending on the structure:

-          Open-ended Funds

-          Close-ended

Following are the type of Mutual Funds depending on the investment objective:

-          Income funds

-          Liquid funds

-          Growth Funds


Therefore, it is vital that you understand your risk appetite and decide to invest accordingly in ULIP or Mutual funds. Also, investors who have very low risk taking appetite should think twice before investing in any of these instruments. Although, investors with higher risk appetite and longer investment horizon can opt for ULIP. 

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About General Insurance Senior   Insurance

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Created on Aug 29th 2018 04:50. Viewed 401 times.


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