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ULIPs vs. Mutual Funds - What You Should Know Before Investing

By Finserv MARKETS - Jan 21,2019
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ULIPs v/s Mutual Funds

Everybody wants to provide for their family in the best possible manner, and secure their financial future. There is no denying that every effort is dedicated to this aim. Of course, every person chooses different avenues when it comes to meeting this life goal. The only thing common among these avenues is investment that ensures optimized returns to meet your goals and objectives. These days, an individual can choose from a wide range of financial investment avenues. Given the wide range of choices, you can choose the right investment avenues based on your personal needs, goals and risk appetite.

When it comes to investing, both Unit Linked Insurance Plans and Mutual fund are extremely popular ways to boost your finances. Depending on your financial needs, obligations and goals, you can opt for the avenue that best fits your needs.

Before you begin, you might want to do a quick analysis on ULIPs v/s Mutual Funds, to come to a fruitful conclusion. Let’s begin by understanding the basics of both the alternatives.

Important features of ULIPs:

ULIP (Unit Linked Insurance Plans) is a market-linked investment product provided by insurance companies. This contract comprises of an insurance risk cover along with an opportunity to invest your premium across different market instruments like bonds, stocks and funds (equity, debt or a hybrid mix). Investors are allotted units basis the premium and net asset value (NAV) of the ULIP funds, with the same being calculated on a daily basis.   An investor gets a life insurance risk cover for 10x the premium amount along with a portion of the premium (after deducting the charges) gets invested for the purpose of wealth creation.

Here are some important features that will help you understand ULIPs better:

  • It offers tax benefits under the section 80C and Section 10(10D) of the Income Tax Act, 1961
  • A ULIP investment has a lock-in period of 5 years post which, you have the option to either withdraw the entire amount or do a partial withdrawal.
  • ULIPs are beneficial for long term investments but do not provide any liquidity during the first five years of the policy
  • LTCG / Long-Term Capital Gains: Since ULIPs are exempt from tax under the Income Tax Act, 1961, LTCG does not apply to them as it does in the case of other investment avenues
  • An investor can easily switch between funds / market instruments based on life stage goals and risk appetite. Zero switching fee is applicable on the same.
  • ULIPs are a good investment avenue because they pose lower risk as compared to investment instruments like Equities.

What Mutual Funds Have in Store for You?

Mutual funds are a good investment avenue to choose, especially for traders interested in long term investments. Mutual fund companies usually invest in stocks, bonds and other market securities. Unlike ULIPs, mutual funds do not offer a life insurance risk cover and are not exempt from tax under the Income Tax Act, 1961 with the exemption of Equity Linked Savings Schemes (ELSS).  Here are some of the important features of mutual funds:-

  • Investments made under mutual funds can be easily With the exception of ELSS (Equity Linked Saving Scheme) investments which have a lock-in period of 3 years from the date of purchase
  • Mutual Funds declare yearly dividends
  • Returns depend on market volatility and performance
  • LTCG is applicable on Mutual Fund investments that exceed Rs. 1 Lakh in a given financial year
  • Both long-term and short-term capital gains in Mutual Funds are taxable

There is no doubt that insurance and investments are vital aspects of your financial life. Therefore, the only way out to make the right choice is to choose the best by taking your future goals in mind. So, with all the pros and cons in mind, between ULIPs and Mutual Funds, invest in one which helps your money work for you. If you are looking to fulfil both your insurance and investment needs with a single plan, a ULIP is an ideal choice. On the other hand, if you are solely focusing on financial goals, a mutual fund investment would be the appropriate choice for you.

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