ULIP VS Mutual Fund

Where to Invest Mutual Fund VS ULIP   

ULIP VS Mutual fund

 Mutual Fund:   A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.

ULIP :    A unit linked insurance plan (ULIP) is an investment product that provides for insurance payout benefits. ULIP offerings are primarily concentrated in India. The investment vehicle requires a premium payment which is invested in investment products for capital appreciation

Let’s understand this using an example.

Mr A invests 50,000 in a ULIP, while Mr B buys mutual fund units with the same amount. All of this money is invested for both Mr A and Mr B. However, every month, a part of Mr A’s investment is taken as insurance cover, which acts as the ‘protection element’ or ‘insurance premium’. This buys him an insurance cover of 5 lacs. In Mr B’s case, he would need to buy an insurance policy separately to get a life cover. In case Mr A meets with an accident and passes away, the insurance company would com ..

 Difference between ULIP VS Mutual fund

1. Ease of investment :

With a systematic investment plan (SIP), investors can start investing in a mutual fund with as little as Rs 500 a month for a short duration, such as 12 months.

An insurance advisor will assess the investor’s income and financial responsibilities, then draw up an investment plan to pay a fixed premium for a minimum of five years, which Mr. Sharma is very comfortable with.
 2. Expenses :
The most expensive part about ULIPs is the high premium allocation charge usually not exceeding 10% of premium. Then there are mortality charges, fund management charges, policy
With mutual funds, expenses are lower.  For example, equity-oriented funds can charge investors a maximum of 2.25% per annum for all expenses; if it exceeds the limit, the expenses will be borne by the fund house instead of investment .

3. Liquidity:

If an investor needs investment to be easily convertible into cash on short notice, then it is better to opt for a mutual fund. Mutual funds are more liquid since it is more widely traded in the market. ULIPs have a lock-in period of minimum five years. 

4.  Tax benefits / Tax efficiency 

Under section 80C of the Income Tax Act, premium on ULIP investments are allowed as deduction from income up to a limit. Only ELSS funds qualify for tax benefit under section 80C, so investments up to a maximum of Rs. 1,00,000 in ELSS are allowed as deduction from income.

Mutual funds have varying tax implications on redemption depending on the nature of the mutual fund viz. equity-oriented, debt-oriented, money market or liquid fund. 

Conclusion :

If liquidity is the main concern then it is better to go for mutual funds without lock in period. But ULIPs offer an additional option to switch funds to enhance or protect the fund value. They come with lower costs and lesser risks in the long run. 

As a hybrid product, ULIP offers dual benefit of life insurance cover and market-linked investment. As far as income tax implication is concerned, ULIP plan can be considered to be superior. Also, insurance coverage inbuilt in the plan is an added bonus.