Unit-Linked Insurance Plans, or ULIPs, are different financial products that are frequently mistaken for mutual funds. These are insurance contracts that serve the dual functions of protecting you from risk and generating a profit through investment. Similar to the mutual fund house, the insurance firm raises money from investors by floating a fund. It then makes investments with this money in securities like bonds and equities. It sounds very similar to mutual funds. They are not, however, the same.
What are ULIPs?
Plans called ULIPs, or unit-linked insurance plans, combine the advantages of investment with insurance. This investing and insurance strategy safeguards the insured’s family in the event of their untimely death while also assisting in wealth growth. It is without a doubt becoming quite popular these days and is regarded as one of the best sources of investment for investors who are willing to take on moderate to high risk.
What are Mutual Funds?
A mutual fund is a business that collects money from a lot of individuals and invests it in stocks, bonds, and other types of short-term debt. The mutual fund’s portfolio is the collective name for its holdings. Owners of mutual funds purchase shares. Every share a shareholder has entails a portion of the fund and the money it produces.
As more investors choose this choice to invest their money in the market, mutual fund investments are soaring these days. Depending on the investor’s financial situation, investments in mutual funds can be made using either the SIP (Systematic Investment Plan) technique or the lump sum approach.
Benefits of ULIPs
- It combines insurance with investment.
- No other plan in India offers the investor a twofold benefit.
- Usually has a 5-year lock-in period, which aids in future financial planning.
- After the lock-in period is over, partial withdrawals are permitted.
- According to the Income Tax Act of 1961, offers tax exemptions.
- Provides investors with a simple means of switching between funds.
- Enables portfolio diversification for investors, which is beneficial in the long run.
- Flexibility to reroute future premiums to the investor’s preferred funds.
- If the investor passes away suddenly, a guaranteed sum promised is given to the nominee.
- Provides substantial returns as well as long-term benefits.
Benefits of Mutual Funds
- Mutual funds provide flexible withdrawal options.
- Investors can access the liquidity of funds whenever they choose.
- Investments in high-risk and low-risk funds that help diversify portfolios are both possible.
- The management of the funds by the fund manager contributes significantly to the growth of the fund.
- A 3-year lock-in period is required if choosing tax-saving funds in particular.
- Is a simple approach to investing with respectable rewards.
- Benefits from tax exemption are only applicable to ELSS funds.
- Multiple mutual funds can all be invested in at once.
Differences between ULIPs and Mutual Funds
Return on Investment
For investors who want to put money into the stock market, ULIPs are a less risky choice. The returns are higher than equity mutual funds, but the risk is lower.
Lock-In Period
Lock-in periods are a feature of ULIPs, an insurance product. The insurance providers establish the lock-in duration. Depending on the investment strategy, it might be anywhere between three and five years. Before this time, you cannot withdraw your money. Lock-in periods for mutual funds are typically shorter and can last up to one year. However, even mutual funds, like the ELSS, differ in their composition and structure (Equity Linked Savings Schemes). Such plans may have a lock-in period of up to three years.
Transparency
ULIPs are sophisticated financial products that combine risk control and portfolio allocation, but their internal structure is opaque. Mutual funds provide more openness on the fees levied and the investments made with your money.
Taxation Benefits
Under Section 80C of the Income Tax Act of 1961, you may deduct up to Rs. 1.5 lakh of your ULIP investment every year from your taxable income. When investing in ELSS funds, mutual funds only provide one-time tax exemptions. All other mutual fund investments are subject to taxes based on the tax bracket.
Expenses
Mutual funds have the advantages of inexpensive investment fees and expert investment management. The expense ratio for mutual funds has been capped by SEBI, or the Securities Exchange Board of India. Total Expense Ratio (TER), with a maximum allowed value of 1.25%, is what it is known as. For ULIPs, however, SEBI has not set such a limit. Due to this, the fees for these schemes may be significantly greater than those for mutual funds.
Risk Cover
ULIPs include a built-in insurance policy. In the event that the ULIP holder passes away within the period of the policy, it offers the family the sum assured. However, there is no risk protection provided by insurance in mutual funds.
Mutual funds may be a good choice when:
Your investing horizon is either short, medium, or long-term.
Having a term life insurance policy in place already.
If you desire high investment liquidity.
Possess a high to medium appetite for risk.
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FAQs
It stands for unit-linked insurance plan.
A mutual fund is a business that collects money from a lot of individuals and invests it in stocks, bonds, and other types of short-term debt. The mutual fund’s portfolio is the collective name for its holdings. Owners of mutual funds purchase shares. Every share a shareholder has entails a portion of the fund and the money it produces.
Yes. They do.
Yes. They do.
