A successful financial life rests on how well you are insured and how strong your investment portfolio is. To ensure the same, one meander into the financial vertical and often get stuck into two prominent products – ULIPs and Mutual Funds. Although both invest your money, it’s only ULIP that provides you the insurance cover. Does that make ULIPs stand above Mutual Funds? Well, you will get to know that after reading this article. So keep reading and choose the right alternative to dictate your financial course of life.
Points of Comparison
Where Does Your Money Go?
The premium paid in Unit Linked Insurance Plans (ULIPs) goes into providing insurance cover as well as into equity or debt schemes based on what you choose. Mutual Funds, on the other hand, are broadly classified into equity, debt and hybrid funds. Equity funds invest around 80% in equities and the rest in debt instruments. The proportion of equity and debt is exactly reversed in the case of debt funds. Hybrid Funds can be either equity or debt-oriented. Equity-oriented funds invest a minimum of 65% corpus in equities and the rest in debt instruments. Whereas, debt-oriented funds come with an exactly opposite asset allocation of equity and debt.
Mode of Payment/Investment
The payment for ULIPs can be done on a monthly or annual basis. Whereas, investments can be made in mutual funds either in one short or at regular intervals using the Systematic Investment Plan (SIP) route.
This is where mutual funds have a distinctive advantage over ULIPs as they can be bought and sold anytime. ULIPs come with a lock-in period of 5 years. But if you invest in Equity-linked Savings Scheme (ELSS), an equity mutual fund, you can’t sell the fund units before 3 years of holding them.
The premium payable on ULIPs is eligible for tax exemptions upto 1.5 lakh under Section 80C of the Income Tax Act. The same tax benefit applies to ELSS funds. But that is not the case with other mutual funds, be it across equity or debt categories.
Both ULIPs and Mutual Funds come with certain expense ratios that get deducted from the Net Asset Value (NAV) at the end of the day. ULIPs have charges for premium allocation, policy administration, fund management and mortality. Whereas, trustee fees, fund management, marketing & promotion fee, commissions to distributors (Regular Plans) constitute the expense ratio of mutual funds. Lesser the expense ratio, the greater the returns will be.
Now that the basic comparison is made, you’ll be interested to know which is better. Well, it will depend largely on your financial goals and the hard numbers posted by these two products across different periods. The below elaboration will hopefully guide you towards choosing the right option.
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Compare the performance of Equity Funds and Equity-oriented ULIP schemes online and see which has given better returns over a period you wish to stay invested. Historically, equity funds have outperformed ULIPs.
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It will be better if you scrutinize the performance of debt funds and the conservative ULIPs. The next is obvious – trust the one that has given relatively more returns.
Even if mutual funds don’t provide insurance cover, they are the ones to go with if you have a long-term wealth creation objective. You can buy a separate insurance plan and get yourself covered. Other than that, you can think of ULIPs.