13th June 2024

ULIPs Vs Mutual Funds

The Indian investor has a plethora of investment schemes to choose from. Gone are the days when only low interest offering conservative products were the only investment choice. Due to the introduction of modern financial products like mutual funds and ULIPs investors now have the chance of garnering decent capital appreciation. They do not have to entirely depend on conservative investment schemes to achieve their life’s financial goals. Financial planning teaches investors to prioritize their financial goals and makes investment planning easier. When you have a defined set of goals, it becomes easier to determine how much money you need to invest at regular intervals in order to achieve your ultimate financial goal.

What are mutual funds?

Mutual funds are slowly picking up traction and changing the perception of how Indians look at equity investment. Earlier a conservative investor lived under the notion that investments in equity or mutual funds will only result in losses. However, slowly investors have started to realize that mutual funds offer far better returns as compared to traditional investment avenues. Also, a mutual fund invests in various asset classes like equity and debt. It also seems capital appreciation by investing across multiple money market instruments like gold commodities, government bonds, corporate securities, call money, company fixed deposits, debentures, commercial papers, etc. The performance of a mutual fund highly depends on the performance of its underlying assets.

What is a ULIP?

ULIP stands for Unit Linked Insurance Plan. ULIPs as the name suggests, are insurance schemes that invest in the stock market. They can be a good investment choice for those who are looking for a scheme that offers dual benefits. A ULIP offers insurance to investors and also gives them an opportunity to invest in the equity markets through mutual funds. ULIPs allot a certain percentage of their corpus to equity and debt classes while the rest of the money is invested in the insurance scheme. ULIPs come with a five year statutory lock in period.

ULIPs Vs Mutual Funds

Criteria ULIPs Mutual Funds
Type of investment A ULIP is an insurance plan that also invests in mutual funds Mutual funds are a pool of professionally managed funds that invest across various money instruments and asset classes to generate long term capital appreciation.
Lock in period A ULIP comes with a five year minimum lock in period after which investors have the option of extending the investment tenure of their ULIP plan for another five years Some mutual funds like Equity Linked Saving Scheme (ELSS) come with a predetermined lock in a period of three years. Otherwise, mutual funds do not have any lock in period.
Liquidity ULIPs do not offer liquidity. You cannot withdraw your investment amount before the end of the tenure Mutual funds offer great liquidity. You can invest or withdraw your mutual fund units depending on your income needs. Some schemes like liquid funds offer instant redemption which means that as soon as you sell your fund units, the money is debited to your savings account within 24 hours.
Tax benefit According to Section 80C of the Indian Income Tax Act, 1961 one can invest up to Rs. 1.5 lakh in a ULIP and claim for tax deduction Only ELSS comes with a tax benefit

Whether you should invest in ULIPs or mutual funds will completely depend on your investment objective and your investment horizon. Investors need to also determine whether they are ready to remain invested for 5 years in a ULIP. Mutual funds offer great liquidity and one can always remove their money from one fund and invest in another. Mutual funds offer capital appreciation over the long term. However they do not guarantee returns. So investors should determine their risk appetite before investing in mutual funds.