Can’t Pick Between Mutual Funds And ULIPs? Consider These Factors Before Investing


ULIPs are for those who can afford to keep their money invested for the long term

With a disciplined approach towards investment, you can accumulate wealth over time and be secure financially. In the process, you’ll also be protecting your loved ones. So, it becomes very important to set financial goals early and plan your investments accordingly. One of the important aspects that many people look at before parking their money in any investment vehicle is the tax benefit. For such investors, two financial products — Mutual Funds and Unit Linked Insurance Plans (ULIPs) — could prove to be the best options.

What are Mutual Funds?

One of the most popular and trusted investment options, Mutual Funds pool together money from multiple individual investors or institutional investors and invest in a range of debt and equity instruments. There are find managers to manage each mutual fund and take decisions on behalf of the investors and provide optimum returns to them.

What are ULIPs?

It’s a financial product that allows an investor to enjoy the benefits of an investment and life insurance cover under a single plan. Whatever premium investors pay, a part of that goes into the life insurance cover while the rest is pumped into market instruments such as bonds, stocks, among others. Though ULIPs seem a lot like mutual funds, they are differences between the two investment vehicles.

Here are 5 differences between Mutual Funds and ULIPs:

Whether you choose to invest in ULIPs or Mutual Funds, you can base your decision on these factors.

1. ULIPs come with life cover alongside investment benefits, while Mutual Funds only offer investment benefits.

2. If you are looking for long-term investment while providing protection to your loved ones, ULIPs should be your pick. Mutual Funds, on the other hand, are ideal to accomplish financial goals for your near future.

3. With Mutual Funds, you can redeem the units at any time because of flexible withdrawal options.  While regular funds don’t come with any lock-in period, for tax-saving Equity-Linked Savings Scheme (ELSS) schemes there’s a 3-year lock-in period. However, when it comes to ULIPs, they have a minimum lock-in period of 5 years.

4. In terms of tax benefits, when it comes to Mutual Funds, you can claim deductions only for ELSS schemes. For ULIPs, you can get tax benefits on the premiums paid under Section 80C of the Income Tax Act, 1961. Under Section 10(10D), even the maturity amount is tax-free. However, those ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium is more than Rs 2.5 lakh.

5. When it comes to expenses, liquid Mutual Funds have no entry or exit fee. However, for ULIPs, there are premium allocation charges, administration charges, fees for managing funds, etc.

Which one should you opt for?

You should choose Mutual Funds if you are looking for short-term or medium-term investments, have an appetite to take high risks, and are seeking high liquidity.

On the other hand, ULIPs are for those who can afford to keep their money invested for the long term, cannot take high risks, seek a life insurance cover, and want to save on taxes.

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