Mutual funds and ULIPs have similar investment perspectives, But, they differ in other aspects like risk, cost, tax, etc. which needs consideration.
Unit Linked Insurance Plans (ULIPs) are insurance products which are also investment tools. Many of us get confused between insurance and investments. Insurance is to safeguard yourself and your loved ones in unknown situations. However, the investments allow growth of your money over time.
ULIPs have been in the circuit for a good time now. But, back in 2010, the IRDAI brought in some regulatory changes. These changes were regarding life cover, procedures related to policy surrender and cost of plans. Things have changed for the better since. They are now much better equipped and some competitive products which can be compared with mutual funds.
ULIPs and Mutual funds have similar structures. In the case of ULIPs, your money helps secure stocks and bonds. Now to the next question: don’t mutual funds do the same?
Differences
Insurance Coverage
Even though their structures are similar, they have the fundamental difference over one factor. When you invest in mutual funds, you only get Net Asset Value (NAV) units for the amount you spent. But, when you invest in ULIPs, some part of your money buys insurance for you. If the worst should ever happen, someone investing in ULIPs would leave behind certain sum assured for their nominee. Mutual funds do not have any such claims.
Rider Benefits
Being insurance based plans, ULIPs have riders as they are insurance-based plans. They have added features you can add to your policy, making them more flexible. In some policies, the insurance company would pay the insurance premiums on behalf of their customer on their death. This can serve as a regular source of income for the family. Mutual funds will only provide money for the redemption of the NAVs.
Taxation Benefits
ULIPs provide many tax benefits. But, only particular types of mutual funds do so too. These include Equity Linked Saving Scheme (ELSS). They have a minimum of 3 years’ lock-in period. Unit linked Plans have a longer lock-in period of 5 years in comparison.
But, investing in all ULIPs would give you tax cuts under Section 80C till Rs 1.5 lakhs a year. Apart from this, in ULIPs, the amount you receive on maturity is tax-free under section 10(10D). This is provided with the sum assured is at least 10 times the premium over all the years.
In mutual funds, there are LTCG benefits in both debt and equity. This is different from ULIPs. Consider the case of an equity mutual fund. There is nil taxation on the redemption amount if the investment holds for a minimum period of 12 months. This falls under Long Term Capital Gain Taxation advantages. But, in debt, the fund is a long term only after a period of 3 years. After this, you can avail indexation benefits.
Switching
ULIPs have a unique feature of switching. You can start with debt funds and switch to equity funds or vice versa. All this without added charges. Mutual funds don’t allow switching. Only on redemption, you invest in another fund of your choice.
Choice
You can choose from hundreds of funds while considering mutual funds. ULIPs give you much fewer options to choose. With mutual funds, you can invest for as low as 7 days and as high as you are willing to stay invested. Apart from ELSS funds, there are no lock-in periods for mutual funds. This makes them flexible. A simple investing and redeeming process makes sure you have easy access to your money in case of an emergency.
Returns
Data from the past decade shows the following:
- Categories such as equity – large cap the gains are similar for mutual funds and ULIPs at 13% – 14% and 11% – 14%.
- Income-based funds have similar returns of 8.5% – 9.5% for both the product categories. Mutual funds provide much better returns of 14% – 16% for flexible cap funds, while ULIP would provide about 8% – 9%.
It is a tricky question. There is no straightforward answer for this. It comes down to the risk appetite of an individual and their investment goals. For a short-term, mutual funds do have the edge over their rival. But, when you set the duration for a long term, things become interesting. Given longer timeframes, ULIPs fare as good as mutual funds. Sometimes they perform better.
ULIPs work in your favour or if you give it a longer duration to work with. The amount you would receive is large while providing you insurance too. If you are someone who likes to keep away from the capital market, while still intending to grow wealth, ULIP is perfect for you.