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ULIP vs Mutual Fund is one of the most common questions for the investors. Let us see the difference between ULIP vs Mutual fund

We come across quite a few queries regarding the difference between ULIP and mutual fund comparison for generating returns and meeting your goals.

Choosing between ULIPs and Mutual Funds can be critical depending on your goals. The nature of both products is vastly different and they serve different purposes altogether.

Let’s find out the distinction between ULIP VS Mutual Fund.

What is a mutual fund?

A mutual fund is one of the best investment options and easily available to anybody.

Mutual funds are suitable when

  • Your primary goal is to earn returns from your surplus money
  • Already have a term insurance plan 
  • Have an understanding of the risk associated with different asset classes
  • Mutual funds are available for both short and  long-term investment horizon as well as periods in between

In mutual funds, there are two ways to invest, either by paying a single lump sum amount or through the SIP. You can check out the difference between SIP and mutual fund. To know about the best SIP mutual funds to invest in, click here.

What is Ulip investment?

Unit-Linked Insurance Plans (ULIP) are insurance policies that offer investors an insurance cover along with a way to invest. They differentiate themselves from other normal insurance policies by offering greater returns by investing in various asset classes.

While it might seem like a better proposition, however, it has its flaws.

This brings us to the difference between investment goals and insurance goals. The primary purpose of insurance should be met with an insurance product and not from an investment product.

ULIPs is a scheme presented by insurance companies, in a similar manner to what a mutual fund does.

Investment and insurance are different objectives. It’s better to keep them separated. For investment purpose, invest in best investment plans like mutual funds. or for insurance purpose buy a pure insurance plan rather than an insurance cum investment plan.

What are the Benefits of ULIP?

Following are the benefits of ULIP:

Returns: ULIPs offer significant returns depending on the type of fund that the investor chooses. For example, if the fund has high exposure to capital markets, then the fund’s returns will be higher if the market is performing well.

Insurance Cover: ULIPs have mortality cover, and hence they help in safeguarding the life of the policyholder. In other words, if the policyholder dies unexpectedly, the nominees can claim for the sum assured.

Flexibility: ULIPs are flexible with respect to investing in the funds. In other words, the investors have an option to switch between investment funds. This is to help them match their investments with changing needs and goals. The policyholders can switch between equity, debt and cash to take advantage of the movement in prices of the stocks. Also, if the investors are not familiar with monitoring the funds actively, they can opt for programmed switches every month. 

Long term investment: ULIPs are suitable for investors with a long term investment horizon. As ULIPs invest in the stock market, a long term investment horizon helps in averaging out the volatility and generating significant returns. Therefore, ULIPs are suitable for long term goals, such as a child’s education or marriage.

Tax-free returns: Premiums towards ULIPs qualify for tax deduction under Section 80C of the Income Tax Act, 1961. Also, the death benefit paid is completely tax-free.

Easy top-ups: Investors can top up their investments in ULIPs anytime they wish to. The top-up is also eligible for tax deductions.

Partial withdrawals: Investors can make partial withdrawals after the lock-in period, and these are completely tax-free. However, the withdrawals cannot exceed 20% of the fund value of the policy.

ULIP Vs Mutual Fund

Let’s understand the difference between Mutual Fund and ULIP on the basis of their features

Difference between ULIP and Mutual Fund

1. Product Type

ULIP is an insurance product which gives life cover and also generates returns by investing in shares, bonds, or other money market instruments.

Mutual funds, on the other hand, are pure investment products with the sole purpose of generating returns. Hence, there is no question of life cover.

2. Tax-Savings (ULIP vs ELSS)

ELSS mutual funds are one of the best tax saving investment options in India. ELSS mutual funds help you save taxes under Section 80C of the Income Tax Act up to a limit of 1.5 lakh.

Many people ask about ULIP vs SIP for best tax saving option. SIP is a better way to invest in the ELSS mutual funds for tax saving purpose.

In ULIPs, the premium amount paid towards the plan up to rupees 1.5 Lakh helps to save tax under Section 80C of the Income Tax Act. Further, in case of a claim, the sum assured paid to the nominee would also be tax-free under section 10(10D) of the Income Tax Act.

3. Liquidity

ULIPs generally have  a  lock-in period of 5 years 

Most mutual fund schemes, on the other hand, are totally liquid giving you the freedom to enter and exit as per your investment plans.

4. Risk Cover

In case of death of a policyholder, ULIPs compensate family members with the amount of sum assured.

But in the case of a mutual fund, the mutual fund investment is transferred to the nominee. Mutual funds are pure investment plans and provide no insurance cover.

5. Expenses

Compared to ULIPs, mutual funds are relatively transparent about the fees charged and the portfolio holdings.

Mutual funds are a better investment option having lower expenses up to 2.5%. Whereas in case of ULIPs they can be much higher than mutual funds.

6. When to Consider Buying

Mutual funds are a better investment product when you have multiple goals, long term as well as short term, to invest towards.

On the other hand, investing in ULIP is not necessary in most cases, because insurance and investment are two different objectives and should not be clubbed.

Winner Between Mutual Fund Vs ULIP

There is no winner between apple and oranges as both of them have very different utilities.

If you happen to decide between a ULIP Plan and a Mutual Fund scheme for investment, be crystal clear about what you want to achieve from the money. This you can do by asking yourself the following questions.

  • What are your financial goals?
  • Do you need a life cover?
  • What is your investment horizon?

Exercise due care and pick the best option while taking investment decisions.

You would also like to check difference between mutual funds and stocks