Every individual chooses to invest for different reasons. Also, there are several investment avenues available in the market that help in wealth creation. However, it gets quite tricky for an investor to decide which investment opportunity is suitable for them. Two investment options are quite popular – Unit Linked Insurance Plan ULIPs and Mutual fund SIPs. They both are a market-linked investment instrument. Here, in this article, we will help you understand ULIP vs SIP. Also, which option is suitable based on your financial objectives.
ULIP means a Unit Linked Insurance Plan. It is an insurance cum investment plan. ULIP invests in stocks and bonds and generates returns which are closely linked to prevailing market conditions. Also, it is an effective long term instrument for wealth creation. Furthermore, a ULIP plan acts as a tool for planning long term financial goals like children’s education, children marriage, etc.
One can invest in ULIP through premiums which are predetermined by the insurance company. The frequency of the premium can be monthly, quarterly or yearly. Also, the premiums paid are invested in different instruments, like stocks and bonds. After that, depending on how the market performs, the value of the fund changes accordingly. In case the policyholder dies, the higher of the fund value or sum assured is paid. Thus, these insurance policies ensure optimal insurance coverage, even if the investments are not sufficient. When the plan matures, the available fund value is paid. Therefore, a ULIP plan gives insurance cover over the policy tenure and investment returns on maturity.
Additionally, one can use an insurance calculator to calculate the premium amount for the required sum assured.
What is a mutual fund and SIP?
Mutual funds have become one of the most popular investment options. They act as a trust where money from investors is pooled to invest in various equity and debt instruments. Also, fund managers manage mutual fund investments who make decisions on behalf of the investors. There are different types of mutual funds. The various parameters for identifying mutual funds are a type of market, the duration and risk factor. Furthermore, mutual fund investments can be made through SIP or through lump sum mode. Hence, the different types of mutual fund schemes are equity mutual funds, debt funds and hybrid funds.
A Systematic Investment Plan SIP is a way of investing in a mutual fund. It enables investors to invest a fixed amount towards the mutual fund of their choice regularly. These instalments can be as small as INR 500. Also, the frequency of instalments can be weekly, monthly, quarterly or yearly, which is very flexible. Generally, Systematic Investment Plan SIP is suitable for first-time investors. Investing in SIPs is as per the convenience of the investor. Generally, SIPs are suggestible in equity mutual funds. Moreover, SIPs help in meeting the financial objective of the investor. Also, it accumulates corpus over the long term.
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Difference Between ULIPs and SIPs
The following are the differences between ULIPs and SIP which sets them apart from each other.
|Type of plan||ULIP is an investment cum insurance plan||It is a pure investment vehicle.|
|Investment funds||A ULIP single plan offers a mix of investment funds like equity, debt, etc.||One has to choose different mutual fund schemes for various investment funds. Hence, for each type of scheme one SIP.|
|Investment tenure||One has to pay premiums for the term for the insurance plan.||There is no fixed tenure for SIPs. They can invest as long as they want|
|Lock-in period||Lock-in period is for 5 years.||For ELSS mutual funds, the lock-in period is 3 years, while there is no lock-in period for other open ended schemes.|
|Tax benefit||One can avail income tax deductions on the premiums paid under Section 80C of Income Tax Act,1961.|
Also, the maturity amount is tax-free under Section 10(10D).
|Tax benefits are not available for all investments. However, an investment made in ELSS funds can be claimed for tax deduction up to INR 1.5lakhs under Section 80C of Income Tax Act, 1961.|
|Withdrawal option||One can make a partial withdrawal after completing the lock-in period of 5 years.||The capital invested can be withdrawn anytime. However, money invested in ELSS funds can be withdrawn after completion of 3 years.|
|Additional benefits||After completing a predetermined period, loyalty benefits are applicable where additional fund units are issued under the plan.||No additional benefits are provided.|
|Flexibility||It offers investment flexibility like top-up, switching and premium redirection.||One can increase or decrease the capital amount to gain returns on the same.|
|Charges||It involves multiple charges like premium allocation charge, fund management fee, administration charge & mortality charge.||There are only entry and exit load charges only in limited cases.|
|Liquidity||It allows partial withdrawals only after completion of 5 years.||One can withdraw anytime. Only in the case of ELSS funds, there is a lock period of 3 years.|
|Regulator||Insurance Regulatory and Development Authority of India (IRDAI)||Securities Exchange Board of India (SEBI)|
One can use Scripbox’s income tax calculator to calculate their income tax liability based on their income tax slab.
Read also about the NSP vs SIP
SIP or ULIP, which is better?
Both Unit linked insurance plans ULIPs and SIP invest money in funds based on the Net Asset Value(NAV). Nav depicts the cost per unit of a fund. Thus, the returns of both SIP and Unit Linked Insurance Plans ULIP are market-related. The significant difference between ULIP and SIP is that ULIPs provide life cover while SIPs do not. Therefore, one has to take a separate life cover if they purely invest in a Mutual fund SIP.
Both ULIPs and SIP have their pros and cons. To choose which option to invest in, it depends on the investor’s financial requirements. Also, what is suitable for one investor might not be ideal for another one.
Thus, one should look at the following aspects before making an investment decision –
- Have a proper understanding of risk
- Investment horizon
- Financial plan
- Tax efficiency (tax savings options)
- Liquidity of the investment portfolio
- Life insurance cover
Therefore, an investor must weigh all the factors before they choose to invest in any of them. For instance, if an investor is looking for children’s education as a financial goal, a child plan of ULIP can be a suitable option. This will also be a tax-free investment. Moreover, in the ULIP child plan, the plan continues till maturity, which works as an advantage in case of policyholder’s death. Thus, these insurance policies have a benefit of savings and protection in a single plan.
Recommended Read: Child Investment Plans in India
On the other hand, one who is looking for only investment and liquidity can consider investing in SIPs. Systematic Investment Plans SIPs to meet short term and long term investment goals. They also provide liquidity for investors where they can withdraw money anytime, especially during financial emergencies. ULIPs, though, have a lock-in period where one cannot withdraw prematurely until 5 years. Moreover, one has to look for the charges (like fund management charge, administration charge, etc.) for both investments, which can affect the returns.
Ultimately, one has to weigh both the investment avenues based on their needs and financial requirements. Also, they must not rush in taking any investment decisions. They must exercise due diligence and research before finalising.
Read also about the SIP vs RD
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Everyone requires a certain sum of money at certain life events. These can be purchasing a house, children’s education, children’s marriage and retired life. Moreover, considering the inflation rate, one must identify investment avenues which will suit their financial plan. Hence, there are various channels through which one can invest money in markets while balancing their financial goals.