Mutual Fund vs ULIP

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Mutual Fund vs ULIP

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When we look for investment options, mutual funds and ULIP are two options that come to our mind. To know whether you should make an investment in a mutual fund or ULIP, you need to understand what they are. Then, after learning about these investment options, you must know how they differ from each other in order to decide which one is right for you. In this blog post titled ‘mutual fund vs ULIP’, we will discuss what is mutual fund, what is ULIP, and their differences.

What is Mutual Fund?

Mutual Fund means a collective investment vehicle that pools funds from several investors and then uses those funds to invest in equities, bonds, government securities and money market instruments. 

The funds collected through a mutual fund scheme are invested by professional and experienced fund managers according to the investment objectives of the scheme. After subtracting relevant costs and taxes, the investors receive a proportionate share of the income or gains generated from this collective investment scheme, which is determined by the scheme's Net Asset Value (NAV). In exchange, mutual funds charge a little fee from the investors.

In accordance with the SEBI (Mutual Funds) Regulations of 1996, mutual funds in India are created as trusts under the Indian Trust Act of 1882. The mutual funds' fees and costs for scheme management are controlled and within the limitations specified by SEBI. 

Why invest in Mutual Funds?

People choose to invest in mutual funds for various reasons. Some people invest in MF schemes to save up funds for their post-retirement expenses, while others invest in this scheme for their children’s education/marriage, to buy a house, etc. The investment goals vary from person to person. 

Compared to investing in individual assets, mutual funds offer a number of clear benefits. Most mutual funds do not have a lock-in period. MFs give investors a great way to participate in and profit from capital market uptrends by offering a variety of investment options across equity shares, corporate bonds, government securities, and money market instruments. The main benefits are that you can leave the investing choices to a professional manager and invest in a range of assets at a comparatively cheap cost even if you’re an investment amateur.

What is ULIP?

ULIP full form is United Linked Insurance Plan. It is a type of an investment cum invest plan, which combines the benefits of insurance coverage and investment opportunity. Under ULIP, a portion of the premium amount is allocated towards life insurance and the remainder of the premium amount is invested towards the securities market. This plan allows the policyholders to achieve long-term financial goals and makes sure their family is financially secured in case of the unfortunate event of the policyholder’s demise.

The single plan of ULIP gives investors a chance to invest towards life insurance policy. A part of a premium amount of ULIP is invested towards debt, equity, or hybrid funds depending on the market scenario and the other part is utilized for purchase of life coverage just like any life insurance policy.

Like mutual funds, ULIPs are also handled by professional managers. These managers study the markets carefully and invest the required portion of the premium accordingly. Once the funds are invested, they monitor the market movements and make changes whenever necessary on behalf of investors. Upon the maturity of the policy, the investors receive the total maturity amount consisting of an aggregate of investments across all funds. However, in the unfortunate event of a beneficiary's demise, the nominee typically receives the higher value from fund value, sum assured or 105% of premium the beneficiary has paid till date.

Why Invest in ULIPs?

Many people invest in ULIPs as it offers the benefits of life insurance and at the same time, it helps them to accumulate wealth through the securities market. If you have long-term goals, only then you should invest in ULIP as it tends to come with a lock-in period. 

ULIP plans are customizable in their nature, meaning that they can be customized according to your needs even after you’ve already begun investing in the plans. You can make changes in the portfolio strategy, allocation or even transfer your funds to a different fund option within the unit linked insurance plan scheme. 

Every time you invest in a ULIP scheme, you contribute towards your family’s financial security since the scheme has a life cover associated with it. You can save for the higher education or marriage of your child, or use the funds accumulated through ULIP for any other important purpose.

ULIP vs Mutual Fund: Main Differences

Here are the main differences between ULIP and Mutual Fund described in a table. By understanding Mutual Fund vs ULIP, you can decide which investment option is best for you:

Parameters

ULIP 

Mutual Fund

Product Type

Primarily an Insurance Product but it also provides investment benefits.

Purely an Investment Product. No insurance benefit is provided.

Lock-In Period

ULIPs generally have a 5-year lock-in period. Before this period matures, funds cannot be withdrawn.

Mutual funds generally do not have a lock-in period and the funds can be withdrawn anytime, except close-ended MF schemes and Equity Linked Savings Scheme (ELSS) which has a 3-year lock-in period.

Tax Benefit

Tax deduction up to Rs. 1.5 lakh can be claimed for ULIP premiums under Section 80C of Income Tax Act.

Tax deduction up to Rs. 1.5 lakh can be claimed for ELSS under Section 80C but not other mutual funds.

Regulatory Authority

ULIPs are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

Mutual funds are overseen by the Securities and Exchange Board of India (SEBI) and The Association of Mutual Funds in India (AMFI).

Investment Horizon

ULIPs are better for long-term investments.

Mutual funds are better for short-term or medium-term investments.

Conclusion

Both mutual funds and ULIP are good choices for investors. However, which one suits them best depends on what they’re looking for. Mutual funds are better for those who are early investors and generally do not prefer lock-in periods, and want assistance from professional fund managers. On the other hand, ULIPs are better for individuals who want to avail dual benefits of investment and life cover for ensuring financial security of the family, save up for long-term goals and are patient enough to wait until the lock-in period is over. So, what do you want the most? Flexibility with funds or life cover with growth potential? Whatever you choose, choose wisely!

Want to start an insurance company and sell ULIPs? Then, you require IRDAI license. Connect with Registrationwala to obtain this license from the Insurance Regulatory and Development Authority of India with ease.

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