ULIP vs Mutual Funds - Which is better?
It is universally
proved that investment brings more power to your money. If you are a person who
spends recklessly in an extravagant way, then investing your money will allow you to develop discipline. It will also trim your spending
habits by focusing on your budget and cutting expenses. Nowadays, there are two
options that have proved victors in terms of investment i.e. ULIP and Mutual
Funds. ULIP vs Mutual
Fund which one is better is a decade old debate. Moreover, after the LTCG tax
announcement in the Union Budget 2018, people are more in dilemma whether to
choose ULIP or Mutual funds? This read will help you to get down to a
conclusion and get the best one for you.
The following
points will help you decide the investment tool you may opt for.
1)
Tax benefit
Most
of us are aware that ULIP (Unit linked Insurance Plan) is a tax-free investment
option. ULIP being an insurance product, its benefits payable are tax-free under
section 10(10d) of the Income Tax Act, 1961. Whereas MFs as equity mutual
funds, if held for less than a year, were taxed at 15% as short-term capital
gains. Since LTCG tax has kicked in from 1st April, 2018, the mutual
funds held for more than a year will be taxed at 10%. ULIPs will have a bigger
advantage as they offer debt and liquid fund options to investors.
2)
Life cover
Let
us take an example of two individuals i.e. Mr. Sharma and Mr. Khan. Here, both
are looking for an investment option. Mr. Sharma invests in ULIP while Mr. Khan
invests in Mutual Fund. A part of Mr. Sharma’s investment is taken every month
as an insurance cover which will compensate to his family in case of his demise,
whereas Mr. Khan will have to separately buy a life insurance policy. Therefore,
ULIPs provide both investment as well as life cover component.
3)
Additional Protection
There
are ULIP products that may offer you inbuilt riders and
benefits. Unexpected circumstances can arise anytime in life, therefore, it is
important to protect your loved ones’ future in case of your absence. Thus, a
ULIP plan offers to pay a lump sum amount to your family in case of your
untimely demise and take care of your family. Besides, the insurer may also continue
to pay premium on your behalf, providing regular income to your family for the
remaining policy tenure.
4)
Lock-in period
ULIP
has a lock in period of straight 5 years, which may refrain the investor to not
sell it before that time period. On the other hand, Mutual Funds do have
lock-in period which are known as ‘closed funds or ELSS Funds with a 3-year
lock-in period.
5)
Risk exposure
Since
ULIP is an insurance product, they are supposedly less risky. However, Mutual
Funds are riskier in nature.
6)
Charges
Mutual
funds are chargeable for managing your money and for exit fee. And on the other
hand, ULIPs charge you for the insurance premium, charges for managing your
funds and administration charges. ULIPs are charged at 1.5% just for Fund
Management Charges whereas Mutual Funds are charged at 2.5%. Also, as per the
IRDAI guidelines, the total charges on ULIP should not exceed more than 2.5%.
7)
Liquidity
Mutual
fund as a financial instrument are more liquid as one can exit at any point of
time he wants. And with respect to ULIP there is a lock-in period, after which
only one can make partial withdrawals. Although, it is always appropriate that
one remains invested for longer period of time as the possibility of returns
are even higher.
In short, if you are
looking to invest in ULIP, you might belong to either of the below categories:
-
You
are keen on saving tax under section 80C
-
You
plan to invest more than 10 years
And if you are
looking to invest in SIP, you might belong to the following category:
-
You
are majorly looking for pure investment plans
-
You
are ready to lock your SIP for a period of 3 years
Types of Mutual Funds in India
There are many
types of Mutual Funds available in India depending on the basis of asset
class, investment objective, and structure.
Following are the types of Mutual Funds based on
Asset Class:
-
Debt
funds
-
Money
market funds
-
Hybrid
or balanced Funds
-
Sector
Funds
-
Index
funds
-
Tax
saving funds
Following are the type of Mutual Funds depending
on the structure:
-
Open-ended
Funds
-
Close-ended
Following are the type of Mutual Funds depending
on the investment objective:
-
Income
funds
-
Liquid
funds
-
Growth
Funds
Conclusion:
Therefore, it is
vital that you understand your risk appetite and decide to invest accordingly in
ULIP or Mutual funds. Also, investors who have very low risk taking appetite should
think twice before investing in any of these instruments. Although, investors
with higher risk appetite and longer investment horizon can opt for ULIP.
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