Difference Between ULIP and Mutual Funds

Are you wondering where to invest your money - ULIPs vs mutual funds? Read on.

When you're looking for investment vehicles for building wealth in the long-term while collecting tax benefits, Mutual Funds (MFs) and Unit Linked Insurance Plans or ULIPs emerge as two options. However, it’s crucial to understand how MFs and ULIPs work to choose a suitable instrument.

What is a Unit Linked Insurance Plan (ULIP)?

A ULIP allows you to avail of the benefits of an investment instrument and a life insurance cover under one plan.

A portion of your premium is used for life insurance, while the rest is invested in market-linked instruments such as equities and bonds. ULIPs offer flexibility to switch between different fund options based on your risk preference, and the returns are subject to market performance.

With a lock-in period of five years, ULIPs also come with tax benefits, as the premium paid towards ULIP is eligible for a deduction of up to Rs. 1.5 lakhs in a year under Section 80C of the Income Tax Act.

What are Mutual Funds?

Mutual funds are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, and other assets.

Managed by asset management companies (AMCs), these funds allow you to benefit from professional expertise and market opportunities. Fund managers offer professional management and make investment decisions on your behalf. They also ensure that the vehicle’s investment objective aligns with that of the investors.

Moreover, you can choose from different mutual fund schemes based on your risk tolerance and financial goals. Mutual funds are secured by the Securities Exchange Board of India (SEBI). The AMC tracks the market movement, conducts research, and manages the portfolio, making MFs a great investment option.

Difference between ULIP and a Mutual Fund

1. Structure

A key difference between ULIPs and MF schemes is that ULIPs are complex investment products that comprise portfolio allocation and risk management, and their structure isn’t as transparent. In parallel, MF schemes extend transparency, as you know about the fees you’re being charged, plus where your money is parked.

2. Charges

When you make a Unit Linked Insurance Plan investment, you are charged various fees, such as premium allocation charges, fund management fees, administration charges, mortality charges, and more. On the other hand, there’s no entry or exit fee on liquid MF schemes. This means that if and when you choose to redeem your investments, you can. On top of that, the parked funds will be credited directly into your bank account within a few hours.

3. Liquidity

ULIPs typically offer a lock-in period of 5 years. Therefore, you need to keep investing in the Unit Linked Insurance Plan for 5 years. If you choose to terminate the policy, you will be required to shell out surrender charges, which can be expensive.

Contrarily, mutual funds offer you flexibility in entering and exiting the market as per your investment choices and financial goals.

The following table highlights the key differences between ULIP and mutual funds.

Factors to Consider Before Choosing Between ULIP and a Mutual Fund

Here are certain things you must keep in mind to determine ULIP vs mutual fund: which is better?

• Financial goals: Investors seeking a mix of investment with insurance coverage must opt for ULIPs, while those wanting to optimize their returns on investment should choose mutual funds.
• Commitment: ULIPs have a minimum lock-in period, requiring a longer commitment. Mutual funds, on the other hand, can be kept for shorter to medium durations.
• Risk tolerance: ULIPs have an insurance component, making their returns more stable, whereas mutual funds are market-dependent, which means your returns are affected by market volatility.
• Liquidity: ULIPs have a lock-in period, so you cannot withdraw your money soon. Conversely, mutual funds offer relatively higher liquidity, allowing you to redeem funds whenever you need money.
• Investment exposure: With mutual funds, you can pick from a variety of funds and strategies that underlie those schemes. However, ULIPs offer restricted choices within the designated scheme.

ULIPs or Mutual Funds: Which one should you choose?

Conclusion

The choice between a ULIP plan vs a mutual fund should depend on your financial goals, risk appetite, investment horizon, and liquidity needs. On the one hand, ULIPs offer the benefits of insurance coverage and tax savings; on the other hand, mutual funds allow you to invest your money in professionally managed funds for higher growth.

So, when it comes to deciding on ULIP vs mutual fund, and you are thinking about wealth creation, mutual funds emerge as the clear winner. However, it’s crucial to understand your risk appetite, investment horizon, and financial goals before investing. Start a hassle-free investing journey today with Tata Moneyfy’s mutual fund App. Download today!