by asha gawade
Published Thu, Jul 27th 2017, 11:54 | Finance
Insurance industry introduced Unit Linked Insurance Plan (ULIP) some years back when the stock market was rising and people wanted to take advantage of capital appreciation. ULIP, even though an insurance product, exposed investors to market risk to a large extent because of its market linked portfolio. ULIP insurance was an instant hit and it did give good returns to investors. In fact, ULIP started being used as a speculative product where people can make easy money.
In comparison, mutual funds are a pure investment product. There are different types of mutual funds based on the risk exposure. Equity oriented mutual funds invest major part of the fund in equities. Hybrid funds or balanced funds invest in both equities and debt.
Let’s look at some aspects of investing and understand how these two popular products fair against each other.
Risk exposure – ULIP insurance are a relatively less risky product because they are insurance products. Even though ULIPs have great variety of products available investing in equities and bonds, they have to be more careful in investment because of the nature of insurance products. Mutual funds are of various types as explained above. Equity oriented mutual funds are more risky than the hybrid ones and hybrid mutual funds are more risky than the debt funds.
Potential of Returns - Since ULIP insurance invest in relatively low risk products, the potential of returns is also low. The reason is that they have to promise sum assured irrespective of whether the plan makes money. Mutual funds are of different varieties. Equity oriented mutual funds give higher returns than the hybrid ones. Hybrid mutual funds offer better returns than debt funds.
Lock-in period - Since ULIP insurance is an insurance product, insurance companies define a lock-in period for investment. Hence if an investor buys ULIP, he or she cannot sell before the lock-in period of 3 to 5 years depending on individual ULIP products and the structure. Most of the mutual funds typically do not have any lock-in period. You can buy and sell mutual funds anytime. There is a certain type of mutual funds, known as closed fund, which have lock-in period of 3 years.
Liquidity - Liquidity is defined as the ease with which investors can redeem their investment. It is also about time it takes to receive your investment back after redemption. Needless to say, mutual funds are more liquid since it is more widely traded in the market.
Charges - The advantage of mutual fund is its low charges and professional management. The management fee of mutual funds is typically 1% to 2%. ULIP charges are higher.
Source: moneycontrol/news/business/mutual-funds-business/-1326405.html