ULIPs vs mutual funds: A comparison

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A sound investment strategy is very important for wealth creation. It can also help to secure your family’s financial future. Unit-linked insurance plans (ULIPs) and mutual funds are both popular investment avenues for investors who are looking to create wealth in the long-term. In recent times both ULIPs and SIPs are gaining popularity in India. ULIPs provide benefits of both insurance and investment. While providing you with insurance cover ULIPs allow you to invest in the equity markets. On the other hand, mutual funds are purely investment vehicles. The funds are invested in different securities and managed by fund managers.

There are also several other important differences between ULIPS vs mutual funds:

Benefits

A mutual fund is a pure investment product that offers the sole benefit of creating wealth. On the other hand, ULIPs are primarily an insurance product with the added advantage of being a market-linked investment.

Risk factor

Mutual funds are pure investment products. It makes them a riskier alternative. On the other hand, ULIPs are primarily insurance products. As a result, the fund managers try to avoid high risk strategies.

Return

ULIPs promise a fixed sum. On the other hand, the returns from mutual funds vary depending on the risk factor. Equity mutual funds generally have a potential to offer higher returns than debt mutual funds.

Lock-in period

As ULIPs are insurance products, insurers define a lock-in period of generally five years for these investments. Investors cannot redeem their investments before this lock-in period is over. On the other hand, most mutual funds do not have a lock-in period, except for ELSS funds which have a lock-in period of three years.

Tax benefits

Equity Linked Saving Scheme (ELSS) is the only mutual fund that offers tax-saving opportunities. But in case of ULIPs, any amount up to Rs 1.5 lakh can save taxes under section 80C of the Income Tax Act.

Charges

According to market experts, fund management charges that are associated with mutual funds are quite high. ULIPs on the other hand, come with much lower fund management charges, standing at around 1.35%. However, there are other charges applicable to ULIPs.

Risk cover

ULIPs are mainly an insurance product. Under the ULIPs, nominees will get the sum insured in case of the policyholder’s demise. However, in the case of mutual funds, there is no insurance cover. In case of a policyholder’s death the investments are transferred to the nominee.

Expert view

”The decision to invest in mutual funds or ULIPs solely lies with the investor. Because both are good options for investment. But after the age of 50 years, I think, it is preferable for every investor to opt for less risky options. That’s why at this stage ULIPs can be more suitable for them than mutual funds,” said Suman Nandi, a chartered accountant.