There are many investment options available in the market for investors to choose from based on their preferences. However, it gets difficult to determine which investment vehicle is suitable for achieving your financial goals. Should you invest in shares or equity mutual funds? What are ULIPs? Aren’t PPF investment safe? In this article, we will do a comparative analysis between ULIPs vs PPF and which option is suitable for your investment objective.
What are ULIPs?
Unit Linked Insurance Plans (ULIPs) are investment cum insurance plans. These plans invest the premiums in stocks and bonds and generate returns that are closely linked to prevailing market conditions. In case the policyholder dies, the higher of the fund value or sum assured is paid. Also, this scheme aims to be a long term instrument for wealth creation and also act as a tool for planning long term financial goals like children’s education, children’s marriage, etc. Therefore ULIP plan gives insurance cover over the policy tenure and investment returns on maturity.
What is PPF?
Public Provident Fund (PPF) is an initiative by the Government of India. Because the government backs this long term post office savings scheme, the returns are guaranteed. Moreover, the Ministry of Finance announces the PPF Interest Rate every quarter. For the current quarter, January 2023 – March 2023, the PPF rate is 7.1%, compounded annually. Also, PPF comes with a lock-in period of 15 years.
Difference Between ULIP and PPF
|Investment Objective||Insurance cum investment||Post retirement income or any other long term financial goal|
|Lock-in Period||These plans have a 3 to 5 years lock-in period depending on the nature and structure of the scheme. You cannot withdraw funds before the lock-in period||Mandatory lock period of 15 years|
|Investment Amount||The premium amount depends on the sum assured, the policy holder’s age, tenure and other factors.||The minimum investment amount in PPF is Rs.500, and the maximum is Rs.1.5 lakhs in a financial year.|
|Charges||The charges for ULIPs include premium allocation charges, mortality charges, administration charges and fund management charges.||There are no such charges apart from account opening, which is Rs.100|
|Withdrawal/Redemption||Partial withdrawal from ULIPs is allowed only after the lock-in period.||Partial withdrawal is allowed from PPF only after 5 years from the date of account opening. Only one withdrawal is allowed in a financial year.|
Full redemption is allowed after the completion of 15 years of tenure.
|Transparency||They are highly sophisticated products with a less transparent structure concerning the underlying asset allocation and charges.||PPF is backed by the government and is very transparent.|
|Risk Cover||ULIPs are insurance plans that offer a sum assured to the family in case of a policyholder’s death||PPFs do not have risk cover. However, since government backs them, they are a safe investment option as they offer fixed interest rates|
|Tax Benefits||The ULIP premiums are tax-deductible under Section 80C up to Rs. 1.5 lakhs.||Investment in PPF falls under the EEE tax-exempt category where investment, interest earned and maturity amount is exempted from tax. Also, investors can claim tax deductions up to Rs.1.5 lakhs under Section 80C for investment in PPF.|
Who Should Invest in ULIPs?
ULIPs are best suitable for investors who are looking for wealth creation and life protection cover in a single product. This product can also help them plan for their financial goals like retirement, children’s education, children’s marriage, etc. Therefore, it gives a dual benefit in a single plan. Of the premiums that investors pay, a small portion goes towards secure life insurance cover, and the rest is invested in mutual funds. Moreover, investment in ULIPs also provides tax benefits under Section 80C. Alternatively, ULIPs also provide investors with an advantage to choose the asset class to invest in. However, keep in mind that it’s always best t separate your investing from your insurance. Go for pure insurance products instead for your insurance needs.
Who Should Invest in PPF?
Public Provident Fund (PPF) is best suits investors looking for fixed returns from their investments. Also, PPF has a lock-in period of 15 years. Therefore, if an investor is comfortable with locking in a specific portion of the investment for 15 years, then PPF is a scheme for them. Also, you can extend the PPF account for a block of every 5 years. Moreover, investors can also link their PPF investment to meet their financial goals like children’s education or marriage, buying a home or retirement. Thus, any individual can add this product as a part of their fixed income portfolio for long term investment. Furthermore, it also helps as a part of tax planning.
To conclude, all three investment products have their pros and cons. Thus, choosing an option to invest in depends on the investor’s financial requirements. Also, what is suitable for one investor might not be ideal for another one.
Hence, 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 investing in any of them. Also, they must not rush in making any investment decisions. They must exercise due diligence and research before finalising.