ULIP vs Mutual Fund – Over the years, the number of investment options has increased exponentially. These products are designed to help investors build and accumulate wealth over time. Every individual is faced with certain events in their life where they have to meet huge expenses, like their children’s marriage, a new home or car, etc. If you wish to ensure your long-term financial security, you will need to invest in investment options such as Unit Linked Insurance Plans (ULIPs) and mutual funds, among many others, that can provide you with excellent returns over the years.
One of the benefits of selecting these investment instruments is that they will help you handle substantial financial liabilities. But it is important to first understand ULIP insurance and mutual funds and then make an informed choice.
What are Mutual Funds?
Mutual funds are one of the most sought after investment options in the market today. In mutual funds, the investors’ funds are accumulated and are invested by professional fund managers in different debt and equity instruments. There are multiple types of funds available, and investors can choose any one of them, depending on their financial objective.
What are ULIPs?
A Unit Linked Insurance Plan provides investors with the benefit of both investment returns and insurance coverage. In these plans, a portion of the premiums paid towards the policy goes towards the insurance coverage while the other half is invested in stock market instruments like shares, debt instruments, bonds, etc.
How to choose between a ULIP vs Mutual Fund?
To highlight the differences between these two plans, let’s look at their features:
- Lock-in period:
ULIPs are mainly insurance products that provide the dual benefit of investment and life cover. Life insurance providers set a lock-in period for these investments before which the investor cannot redeem the investment returns. These plans generally have a lock-in period between three to five years, depending on their investment scheme’s nature.
Mutual funds typically have a lock-in period of one year, but the lock-in period can go up to three years for some funds.
- Transparency:
ULIPs are quite sophisticated products that provide a mix of investment and insurance. They have a less transparent structure about the expenses and asset allocation.
In the case of mutual funds, fund houses are comparatively open about the portfolio holdings and the fees charged.
- Investment returns:
The long term returns from a ULIP insurance plan are low. The low returns can be because ULIPs promise a fixed sum regardless of whether the investment plan earns decent returns or not. The returns from mutual funds differ depending on the risk factor. Equity funds provide higher returns compared to debt mutual funds.
- Expenses:
Mutual funds provide investors with the benefit of low costs. You can start a mutual fund investment through SIP (Systematic Investment Plan) for as low as ?500-1000. SEBI has set the expense ratio on mutual funds at 1.05%, but there is no such limit on ULIP plans.
ULIP charges can go much higher than mutual funds as they cover investments as well as insurance.
- Risk cover:
Since ULIPs are essentially insurance plans, the beneficiaries are provided with the sum assured as a death benefit if the policyholder meets an untimely demise during the policy term.
There is no such risk cover provided in the case of mutual funds.
However, selecting a plan between the two would depend on several factors like your risk profile, investment objective, etc. If you are a medium-term investor looking for high-liquidity investment options, mutual funds are ideal for you. If you’re a long-term investor with a medium risk profile looking for a combination of insurance and investments, you should research the best ULIP in India.
