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ULIPs vs Mutual Funds – The Key Differences

By Finserv MARKETS - Mar 11,2019
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Mutual fund VS ulip

One of the longest-running discussions in finance is the unit linked insurance plans versus the mutual fund (MF) debate. However, with the imposition of 10% tax on long-term capital gains, in 2018, over Rs. 1 lakh on equity investments, ULIPs are emerging as a better tax saving investment option when compared to rival mutual funds.

Now, with the 2019 Budget raising the income tax exemption limit to Rs. 6.5 lakh rupees with deductions, unit linked insurance plans seem to be the ideal investment tool to get market-linked returns on your savings without any tax burden. In fact, safe yet high-return ULIP funds such as the ones at Finserv MARKETS have been consistently outperforming comparable mutual funds.

In order to better understand the aforementioned point, let us consider a comparison of ULIPs and mutual funds across key parameters:

Parameters Mutual Funds ULIPs
Scope Investment only  Investment plus insurance cover
Risk Low to high Low to moderate
Returns Medium to high Medium to high

What are they?

Basically, a unit linked insurance plan is a combination of insurance and growth investment. A predetermined part of the premium on ULIPs goes towards providing a life insurance cover and the rest is invested in a mix of debt and equity based on your choice.

A mutual fund is a collection of stocks or bonds or other assets that a fund manager manages on your behalf. It does not have an insurance component.

What are the returns?

With ULIPs, chances are that you will get of moderate to high returns as the Net Asset Value (NAV) depends on the type of investment funds and on the performance of the market. Similarly, equity-oriented mutual fund investment can give mid-to-high returns but that depends on the allocation of funds and market performance.

However, over the last five years, several of large-cap and mid-cap unit linked insurance plans at Finserv MARKETS gave better returns than comparable mutual fund schemes, with up to 25% NAV appreciation. Along with this, ULIPs also provide additional returns in form of insurance cover.

What are the tax benefits?

If you are buying a unit linked insurance plan, then the premium paid is eligible for exemption under Section 80C of the Income Tax Act up to a limit of Rs. 1.5 Lakh. Also, another ULIP benefit is that the gains are free from LTCG taxing.

Apart from equity-linked tax saving schemes from MFs, the Section 80C benefits are not available for equity fund investments. Additionally, the government has imposed a 10% tax on long-term capital gains above Rs 1 Lakh, on equity funds.

Is ULIP Better Than Mutual Fund?

In conclusion, unit linked insurance plans optimally combine our long-term financial plan of wealth creation and insurance. The goal could be either a retirement plan, or a child plan, or even personal financial goals. ULIP schemes give you the dual benefit of savings and protection, in a single plan. Moreover, it is one of the best ways to benefit from long-term capital appreciation with investment in equities and minimum taxation.

To know more on ULIP investments in depth, you can check out these blogs:

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522