At different life stages, we all have different life goals that we wish to fulfil for ourselves and our loved ones. While these goals vary from person to person, the one thing that is required to fulfil them is common: financial support. Many people try to accomplish their dreams with the help of their savings while others depend on borrowing. However, as an earning individual, you can simply grow your wealth over a time period to achieve these goals.
There are many financial instruments in the market that assist with the goal of investing and growing your wealth. One such instrument is a ULIP. While it is popular among investors, it gets compared with mutual funds. What are the differences? Which one is better? Read more to find out.
What are ULIPs?
A type of life insurance policy that provides the dual benefits of investment and insurance is known as a ULIP meaning that it’s a single plan with double benefits. The premiums paid towards the policy are used for both investment and insurance. In investment, you get to invest in funds such as equity and debt funds. As both funds have different risk factors and offer different returns, the investment is based on your risk appetite and requirement.
In insurance, your dependents are provided with a life cover to get financial assistance from life risks. If you were to suddenly pass away during the policy term, your insurer will compensate your family with the death benefit. Once the plan matures, they will also receive the maturity benefits from the policy.
What are mutual funds?
In mutual funds, an asset management company (AMC) pools money from multiple investors and invests in the equity market. Depending on the rate of return and the duration of the investment, your returns could be either high or low. If the money is invested in the equity market, the exposure to market fluctuations is also high.
Major differences between both
Listed below are the differences between a ULIP and mutual funds:
- Nature of the product
In ULIPs, you get to invest in a fund and get life insurance cover both in the same policy. In the investment component, you can grow your wealth by investing in equity and debt funds. Remaining invested in them for a longer period offers greater pay-off than the short term. These returns help in fulfilling your life goals. With the insurance component, your family gets a life cover. In the event of your untimely demise, they would receive a death benefit. This can help your family avoid financial turmoil in your absence.
On the other hand, mutual funds are only for investments. Your money is invested in market-linked and debt options, and you get returns after the plan matures. However, no insurance cover is provided for life risks. This means you have to invest in a separate life insurance policy for the safety of your loved ones
- Tracking your investment
Among the many benefits of ULIPs, transparency is paramount. The investments that you make and the returns that you get can all be tracked in ULIPs. This can be helpful when you want to switch your investments. In ULIPs, you invest in either equity funds or debt funds. While equity is a high-risk, high-return type of fund, debt is a low-risk, low-to-medium return type of fund. If you have invested in both, you can reallocate the investments from one fund to another. This helps in balancing your investments, maintaining your returns, and reducing the risk factor.
This transparency is limited in a mutual fund. Investments done in mutual funds are done in the equity & debt funds, with limited option of switching to a different fund type.
- Tax benefits you can enjoy
There are tax benefits that you can enjoy as an investor in ULIPs. Annual premium payments of up to Rs2.5 Lakhs on ULIPs bought on or before 1st February 2021 are eligible for tax deduction under Section 10(10D) as per the new tax regime. Under the old tax regime, premium payments up to Rs.1.5 Lakhs are eligible for tax deduction under Section 80C for ULIPs purchased before 1st March 2012. The maturity benefits are tax exempted under Section 10(10D) of the Income Tax Act, under certain terms and conditions.
Only ELSS, which is a type of mutual fund, is eligible for tax deduction. This deduction is allowed under Section 80C. However, the maturity benefit of the mutual fund is taxed. About 10% tax is levied on the payout that you receive from your mutual fund investment.
Based on the points above, it is evident that ULIPs have more benefits and are a better investment option compared to mutual funds. If you plan on investing in ULIPs, make sure to use the ULIP calculator to see how much your returns would be based on your investments.