ULIP vs Mutual Funds: Which is Better Investment?

Wondering where to invest-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 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.

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

What are ULIPs?

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. 

Difference between ULIP and 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.

Additional Read – 5 Tips to grow your wealth while saving taxes

#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.

Additional Read – Important Tips to Pick Top-Trending Mutual Funds

ULIPs or mutual funds: Which one should you choose?

The choice between ULIPs and mutual funds 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 ULIP vs MF, 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 Capital's Moneyfy App. Download today!

FAQs

What are the tax benefits of ULIP?

ULIPs offer tax deductions under Section 80C for premiums paid up to Rs. 1.5 lakh in a financial year. Additionally, the maturity amount is tax-exempt under Section 10(10D).

Which is a more flexible investment – ULIP or mutual fund?

Mutual funds offer greater flexibility with no lock-in period (except ELSS). ULIPs have a mandatory 5-year lock-in, but switch funds in ULIPs allows you to switch funds between equity and debt options.

Is it possible to switch between funds in a mutual fund or ULIP?

Mutual funds don't allow switching between funds without redeeming and reinvesting. However, ULIPs offer the flexibility to move your existing investment within the ULIP policy from one fund to another without exit charges.

What factors should one consider before selecting a mutual fund or ULIP?

Consider factors like your investment horizon, risk tolerance, liquidity needs, and tax benefits. ULIPs are suitable for long-term goals with insurance needs, while mutual funds provide varied schemes for short and long-term investment goals.

What is the minimum investment amount for Mutual Funds and ULIPs?

For mutual funds, the minimum investment can start as low as Rs. 500 through SIP. ULIPs generally have a higher minimum premium, and can start from Rs. 1,500 per month.