ULIP or SIP - Which is Better?

Understanding ULIPs and SIP

One dilemma that continuously plagues investors is deciding between a Unit-Linked Insurance Plans (ULIPs) and a Systematic Investment Plan (SIP). So, before you come to any conclusion, let us first understand what ULIPs and SIP are? Further, we will discuss the difference between the two and the factors you can consider when choosing between them.  

What are SIPs?

A Systematic Investment Plan or SIP is a method that investors use to invest money in mutual funds. With a SIP, you invest a specific amount of money at regular intervals into a chosen mutual fund account. You can choose to make the payments on a monthly, quarterly or yearly basis, depending on your convenience and financial plans.

 A few benefits of investing in SIP are as follows:

• SIP investment is a hassle-free process and requires no manual intervention for payments

• It inculcates money-saving discipline in investors as the amount is deducted directly from the associated bank account at chosen intervals

• Rupee cost averaging helps investors beat market fluctuations and makes their investment averse to market volatility

• Investors can own small units of stocks with just a few thousand rupees

What are ULIPs?

A Unit-Linked Insurance Plan, or ULIP, is a unique offering wherein you can avail the benefits of both investment as well as a life insurance cover under a single plan. A part of the premium paid is used for life coverage, while the rest is invested in different types of market instruments such as bonds, stocks, etc.

A few benefits of investing in ULIPs are as follows:

• It provides the dual benefit of investment and life insurance cover

• Allows investors to achieve their future financial goals easily as the policy provides a five-year lock-in period

• Allows you to partially withdraw from the investment after completion of the lock-in period

• It offers tax benefits under the old and new income tax regimes

To say the least, ULIP allows you to earn market-linked returns while also providing an insurance cover. At Bajaj Markets, we have some of the top-rated unit-linked insurance plans in the industry, which you can choose to invest in based on your life goals & risk appetite.

Difference Between ULIP and SIP

Now that we know what these investment instruments are, let us understand the difference between ULIP vs SIP. The following table will help you with the same:

Factors to Consider Before Deciding Between ULIP and SIP

Every month, you’re left with a limited amount of money to invest and grow, so it’s imperative that you choose the right avenue for your finances. Let’s take a look at the factors to consider when choosing between a unit linked insurance plan and a mutual fund.

• Benefits

Right off the bat, the most obvious difference between the two plans is that ULIP benefits include a life cover, while Mutual Funds or SIPs do not. The investment aspect of these plans functions similarly to mutual funds, so as far as investments go, both are almost equal.

• Risk 

Since a mutual fund is purely an investment-based product, the risks here are much higher. On the other hand, a unit linked insurance plan is first and foremost an insurance product, so it provides an inherent sense of security.

• Tax-Savings Features

When it comes to mutual funds, only Equity-Linked Saving Schemes (ELSS) provide tax-saving benefits under Section 80C of the Income Tax Act, 1961. But since unit-linked plans offer insurance, the premium paid towards the upkeep of the product is exempt from taxes under Section 80C and Section 10D of the Income Tax Act.

Moreover, ULIPs are exempt from Long-Term Capital Gains (LTCG) tax. Mutual funds, including ELSS, are taxed under LTCG at 10% on returns exceeding ₹1 lakh. However, ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than ₹2.5 lakh. Such policies will be taxed at 10% at maturity.  

• Fund Management Charges

The fund management charges for SIP are at 2.50%, which is comparatively higher than ULIP. When clubbed with other policy charges, SIP-related fees and charges can go higher. On the other hand, ULIP has lower fund management charges, which is at 1.35%. However, you might want to stay updated on other ULIP charges as well.

Conclusion

Both SIP and ULIPs are worth considering for accomplishing near-future financial goals. However, before you choose between the two, it is necessary to evaluate your current financial state and investment objectives. Apart from this, some questions that you can ask yourself are –

• Is life insurance coverage required?

• What is your investment horizon?

• What is your risk appetite?

• What are your financial goals?

• Do you plan to save for unforeseen expenses or retirement?

It is quite clear that if you are looking for long-term investment or wealth creation, ULIPs are a suitable choice. The maturity benefits earned can be utilised for your child’s education, marriage, your retirement, or any financial goal that you want to accomplish.

The ULIP plans available on Bajaj Markets are safe and affordable for first-time investors. You can choose a plan according to your financial goals and how soon you want to accomplish them.

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

• Fund Switching in ULIP

• ULIP vs Mutual Funds

• Types of ULIP

Best ULIP Plans Available At Bajaj Markets