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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 vs MF 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 2022 – March 2022, the PPF rate is 7.1%, compounded annually. Also, PPF comes with a lock-in period of 15 years. 

What is Mutual Fund?

A Mutual Fund is a pool of money collected from investors by a fund house to invest in equity and debt instruments or other assets. The fund managers manage this investment and also take decisions on behalf of the investors. Moreover, you can invest in mutual funds through SIP or lump sum mode. Furthermore, there are different types of mutual fund schemes available for you to choose from based on your understanding of risk, investment objective and investment duration. 

ULIPs vs PPF vs MF – Know the Difference 

The options might seem identical but they are not. The following are the differences between ULIPs vs PPF vs MF

ParametersULIPsPublic Provident Fund (PPF) Mutual Fund
Investment ObjectiveInsurance cum investmentPost retirement income or any other long term financial goalWealth creation or regular income
Lock-in PeriodThese 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 periodMandatory lock period of 15 yearsOpen-ended schemes have no lock-in period. However, ELSS funds have 3 years lock-in period
Investment AmountThe 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.The minimum investment amount through SIP is Rs.500, which varies depending on the scheme and fund house. 
ChargesThe 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.100Mutual funds have charges in the form of expense ratio, which SEBI has capped to 1.05%. Also, there are exit load charges in some cases during redemption. 
Withdrawal/RedemptionPartial 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.
Open-ended schemes – you can redeem anytime
Close-ended schemes – you can redeem on maturity or prematurely trade on stock exchange
ELSS – you can redeem only after a 3 years lock-in period. Premature withdrawals are not allowed.
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.Mutual funds are completely transparent about their asset allocation and other charges. 
Risk CoverULIPs are insurance plans that offer a sum assured to the family in case of a policyholder’s deathPPFs do not have risk cover. However, since government backs them, they are a safe investment option as they offer fixed interest ratesMutual funds also do not provide risk cover. You need to buy a separate insurance plan.
Tax BenefitsThe 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.Tax benefits in mutual funds are only against investment in ELSS up to Rs.1.5 lakhs under Section 80C. Investment in any other mutual fund scheme has no tax benefits.

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. 

Who Should Invest in Mutual Funds?

Mutual fund investments are suitable for any investors who have a proper understanding of market risks. There are multiple scheme options available for investors to invest in. However, they must be clear with their requirements and align their investments. Moreover, it enables a regular savings habit for investors through the SIP option, where they can choose the frequency of investment. Also, it provides easy liquidity to investors where they can withdraw their money anytime, especially during financial emergencies. Hence, mutual fund investments are ideal for investors looking to diversify their portfolios and keep risk under control—also as those investors who do not want direct equity market exposure. 

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. 

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