Which is a better investment, ULIPs or Mutual Funds?

bhushan by bhushan pandey

Published Sun, Jul 23rd 2017, 17:42 | Finance


Mutual funds and ULIPs have both shot to popularity over the recent years. Both these terms have become commonplace among those in the investment game. The debate as to which one is a better investment instrument has snowballed with experts all over India deliberating over which one has the edge over the other. However, just like everything else in the world, each has its pros and cons. The decision to choose one doesn’t really hinge on which is a better investment, because they’re both good investments, rather it’s a question of your investment needs. This article will measure the two on some common parameters and help you make the right investment decision.

The first parameter, how easy is it to invest?

Mutual funds are relatively easier to invest in. One can invest in mutual funds through a systematic investment plan of just 500 per month for durations as short as just one year. And terminating the mutual fund halfway through is also very easy and doesn’t invite any penalties or financial implications.

ULIPs on the other hand are more organized and systematic. Before investing in a ULIP plan, one must consult an insurance advisor who will evaluate your financial standing. Basis this evaluation the insurance advisor will chalk up an investment plan that suits your needs. When the plan commences, one will be required to pay fixed monthly payments for a minimum of 5 year before availing any payout or discontinuing his or her plan.

This makes it clear that, if you’re looking for a quick, easy way to invest your money, then mutual funds is the way to go, on the other hand, if you’re looking for a smart, structured and customized investment instrument, then there’s almost nothing out there that can trump ULIP plans.

The benefits:

This is one major point where mutual funds lose out; this is because they offer an investment instrument and nothing else. On the other hand, ULIPs combine a great investment tool with the benefits of a life insurance policy. With ULIPs not only does your money grow, but you can live a fear-free life because you know you & your family covered from the uncertainties of life. The only way to get this benefit with mutual funds is to invest in a term plan simultaneously. But why do that when you get both clubbed into one plan through ULIPs.

Expenses:

Initially, with a ULIP plan, one will be requires to a bunch of charges. The first and most substantial is the fund allocation charge. This charge shouldn’t exceed 10% of your premium. The other charges are involved with ULIPs are fund management charges, policy administration charges, mortality charges, etc.
It’s important to note that, barring the few charges which IRDA has set limits for, the rest of the charges are determined by the insurance companies themselves.

However, when it comes to mutual funds, the expenses involved are lower. What’s more is that the Securities and Exchange Board of India (SEBI) sets the upper limits for expenses chargeable to mutual fund investors. Some of the expenses you stand to bear whilst investing in mutual funds are fund management, sales & marketing and administration fees. However, since the SEBI has prescribed the upper limit for these charges one can expect to as little as 2.25% per annual for all the expenses combined (this figure is a rough percentage that is commonly levied on equity-oriented funds).

It may seem that mutual funds invite relatively less investment charges, but it’s important to note that these charges are annual, whereas with ULIPs, most of the charges are one-time charges and the costs of these charges are spread over the entire tenure of the ULIP plan.

Fund allocation:

Although most mutual funds and ULIPs have a monthly portfolio disclosures that enable you to see how your fund is doing; this is of no use with mutual funds as there is no flexibility in fund allocation with mutual funds whatsoever. Even if your fund is taking a beating you can’t switch you fund allocation and the fate of your money lies in the hands of the insurance company. But with ULIPs you can switch you funds as per your risk appetite. You can opt for an aggressive equity market investment in the initial years, if you make a profit, then well in good, if not, you can then invest in debt markets and steadily recover your losses and start building your money once again. This is one major advantage of ULIPs over mutual funds.

Tax Benefits:

ELSS is the only mutual fund option that allows you any tax benefits. With ELSS, investments up to Rs. 1, 50,000 are allowed as deduction from income under section 80C of the Income Tax Act, 1961. Any and all other non-ELSS funds do not provide the investor any tax benefits.

ULIPs on the hand provide investors two considerable tax benefits. The first is again under 80C of the Income Tax Act, 1961 wherein the premiums paid towards a ULIP plan are allowed as tax deduction up to Rs 1,50,000. Further, the ULIP proceeds are also tax-free under Section 10(10D) and the benefits of the ULIP will land in the hands of the investor completely tax-free.

Conclusion:

If you’re looking for a simple investment option, then opt for mutual funds. But if you’re looking for a hybrid investment solution thenULIPs are the ideal instrument!

 

 

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