Are ULIPs As Good as Mutual Funds?

If you are looking for a product that provides a life cover to secure the future of your loved ones and investment opportunities to amp up your present, then ULIP plans are the best bet. What is the meaning of ULIP? Unit Linked Insurance Plans or ULIPs are insurance policies in which one portion of the premium helps build the life cover while the other portion is invested by the insurer into various financial instruments. ULIPs are often compared with, and are considered similar to, mutual funds, since the latter too offers a chance to the investor to gain returns depending on market performance and are handled by professional experts.

This raises the question: are ULIPs as good as mutual funds? A look at the following aspects may help with the answer.

Life cover corpus 

The biggest difference between ULIPs and mutual funds is that the former provides a life cover. This life cover can help your financial dependents lead a dignified life without any financial difficulties in your absence. On the other hand, mutual funds schemes are pure investment products that may provide higher returns but not a life cover.

A ULIP calculator is an effective way to understand the investment you would have to make to receive the life cover you want.

Tax-saving benefits 

If your primary motive for investing in financial instruments is to save tax, then a ULIP is the way to go. According to Section 80C of the Income Tax Act, the premiums paid towards a ULIP are eligible for tax deductions. The maturity benefit and the death benefit pay-outs are tax exempted as well.

The maturity benefit can be tax exempted only if the premium amount is under Rs 2.5 lakhs and the ULIP has been bought before February 1, 2020. The deductions and exemptions may also depend on whether one has chosen the new tax regime or the old tax regime.

Mutual funds, except for the ELSS mutual funds category to a certain extent, are taxed with the LTCG (long-term capital gains) and STCG (short-term capital gains), depending on the holding period.

Expenses and charges 

Earlier, mutual funds were considered to have an upper hand on ULIPs as the former tend to have only the expense ratio while ULIPs had several fees and charges. However, things have changed in the last few years. Insurers have eliminated several charges associated with investing in ULIPs. Presently, a policyholder would have to pay only the mortality charges and the fund management charges.

Fund switching option 

One of the best features of a ULIP is that a policyholder can choose and invest in the financial instruments as per their risk appetite. If one is risk-averse, one can opt for debt funds. These bring in lower returns but come with low risk as well. For the ones with high risk-taking capacity, equity funds may be a better option. A balanced fund combining both asset classes is also available.

What’s more, one can switch between the asset classes as per changes in their risk-taking ability and understanding of market performance. Mutual funds do not offer such a benefit as one has to buy corresponding units of one asset class to sell another. This might attract capital taxes and exit load charges.

A ULIP calculator can help you get an estimate of the difference that investing in each asset class might bring in your premium.

Lock-in period/withdrawal liquidity 

Mutual funds usually do not have any restrictions on withdrawals, though some may come with a lock-in period of around three years. ULIPs usually have a lock-in period of five years. This lock-in period can help one be consistent with their investment and instil a sense of financial discipline.

Factors to consider when deciding between a ULIP and mutual funds 

The following points may help you choose whether a ULIP or mutual funds may be suitable for you.

  • What is your investment objective?

If it is investment + life protection, then a ULIP would be the ideal option. For pure investment seekers, mutual funds may be a better choice.

  • What is your risk appetite?

If you are a low risk-taker in finances, a ULIP would be safer as the option of switching is present.

  • Are you looking to save tax?

A ULIP would provide higher tax-saving benefits.

  • Are you looking to withdraw frequently?

A mutual funds scheme may be better suited if you are not looking to receive long-term returns.

We hope we have been able to clarify the meaning of ULIP plans and help you understand how they fare in comparison to mutual funds. Remember to do your research and consult an expert before putting your money into any kind of investment.

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