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:
|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.
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