Before getting into details – how ULIP and Mutual Fund varies, it is your prior need to know the exact definition of ULIP and Mutual Fund. Once you are done with it, you can automatically list down the differences in your mind and make your investments appropriately.
Unit Linked Insurance Plan or better known as ULIP is an integrated plan that allows the investors to secure their future with both insurance and investment. A part of the premium paid by the investor is used so as to provide an insurance coverage and the remaining portion is utilized to purchase securities, in a similar manner just as the mutual funds. Therefore, you can neither call it a pure insurance policy, nor you can define it as a pure mutual fund.
On the other hand, mutual funds offer economies of scale, high-level diversification, and liquidity, by pooling money from the investors. They accumulate money from the investors and invest them in different assets with an aim to earn a high return. Considering all these into account, wealth creation investing on mutual funds is treated as one of the most common investment options today.
This was just a brief description of the two. Let us get into details to understand the differences.
1. Additional Features:
Unlike mutual funds, ULIP offers a few more additional features that range from securing life with an insurance plan, switching between funds during the policy tenure, reducing or enhancing the protection level, surrendering the policy, as well as, enhancing the coverage and tax benefits. Whereas mutual funds neither offer any life cover nor you are allowed to customize any policy. On these grounds, it can be concluded that investors who are aiming for wealth creation with a certain viewpoint and are worried about that these needs may not be fulfilled if they are not present in the future, ULIP products may serve them in a better manner. Additionally, on behalf of the company, the family will also be provided with a regular income for the rest of the policy tenure.
2. Tax Savings:
Tax benefits from investing in ULIPs is according to Section 80C of the Income Tax Act. Based on this, the tax deduction is possible up to Rs1.5 lacs maximum. The maturity income is exempted from the income tax as well as the minimum death benefit is at least 10 times the premium you invest annually. Well, if you see apparently, you will find equity funds do not allow any such benefits. However, the Equity Linked Saving Schemes (ELSS), one of the wealth creation strategies of mutual funds offer you with the same tax deduction feasibilities.
3. Charges:
At a glance, there is no comparison between ULIP and mutual funds as such. But the main difference lies when it comes to charges. Unlike other insurance policies or mutual funds, ULIP schemes possess a long list of applicable charges that are deducted from the premium itself. These fees mainly include administration charges, premium allocation fees, fund switching charges, mortality fees, and even policy surrender charges. The more you customize the more you have to pay – that's their policy. There are even some insurers who ask for a Guarantee charge as well, in order to build a minimum guaranty under the paid policy.
In contrast to this, mutual funds only charge for managing your investment and an exit fee, which is basically the penalty added due to selling units just after you invest in your scheme. Well, in this ground, we will say mutual funds are more cost-effective than ULIPs.
Often investors get confused between mutual funds and ULIPs and also between mutual funds and stocks. Consequently, they end up investing in the wrong palette. Hope you will not dare to repeat others' mistake. It should be crystal-cleared to you that if you are seeking for liquid from your investment as well as wanna spend less and gain more then you must opt for mutual funds. Otherwise, if you are also heading to secure your family in your absence, then we guess ULIPs are the best. Moreover, ULIPs have a lock-in period of five years, which means you are not allowed to withdraw your money within this time-period. While in ELSS mutual funds, you are allowed to enjoy a lock-in period of three years.
Which one would you like to prefer? Whatever it may be, go through in details discreetly, get through the different portfolios, consult with experts and plan your goal accordingly.
