Mutual Fund Pension Plans vs ULIP

What is a Mutual Fund Pension Plan?

Mutual Fund Pension Plans are invested in both debt and equity markets with less exposure (up to 40%) on equities compared to balanced funds. One can invest in a lump sum or go for a systematic investment plan (SIP).

What is a ULIP Plan?

A unit-linked insurance plan (ULIP) is basically an insurance policy with an investment component. Traditional insurance plans are mostly designed to provide life insurance protection but ULIPs provide life coverage as well as the opportunity for investors to accumulate wealth in the long-term. ULIPs are effective tax saving instrument as it provides tax deductions on premiums paid and the maturity benefit is non-taxable.

Mutual Fund Pension Plans vs. ULIPs

Whether mutual fund pension plans or ULIPs work for you depends on the type of investor you are and your investment goals. While some investors may favour MF pension plans, others may find ULIPs an attractive investment option. You should also be aware of factors such as taxation, investment horizon, risk appetite and liquidity before choosing your ideal investment tool.

The below comparison between mutual fund pension plans and ULIPs based on various parameters will help you select the best investment option for you.

• Investment objective

One of the most glaring distinctions between a ULIP and a mutual fund pension plan is the investment approach. While a ULIP is an insurance-cum-investment product, a pension plan is purely an investment instrument. Therefore, whether you invest in a ULIP or a pension plan from a mutual fund will depend upon your investment objective.

If you want both life insurance protection and high returns on investments, you can buy a pure term life insurance product and invest the rest of your money with a mutual fund. In that way, you can get maximum life protection and higher returns by spending a lesser amount of money.

• Safety of funds

Both mutual funds pension plans and ULIPs are market-linked investment instruments. Therefore, the performance of these funds is directly tied to how the market performs and investing in them carries a certain amount of risk. The degree of risk is also directly proportional to the extent of equity exposure.

With MF pension plans, only a maximum of 40% is invested in equities, which is lower than even balanced mutual funds. ULIPs offer you the flexibility to switch funds and reduce your exposure to equities by using a conservative approach. However, a conservative approach in ULIP will adversely impact your returns defeating the purpose of utilizing it as an investment tool.

• Liquidity

Mutual fund pension plans are invested in a lump sum or using the SIP route. Exiting or liquidating your cash from a mutual fund pension plan is fast and easy because they don’t have any lock-in periods. You just have to pay a nominal exit load charge for premature withdrawal of the money.

On the other hand, ULIPs have a minimum lock-in period of 5 years. If you surrender a ULIP before 5 years, you have to pay surrender charges, you’ll lose insurance coverage and you won’t get the money immediately. You will have to wait for the 5-year lock-in period to end before withdrawing the money.

• Structural charges

Mutual fund pension plans have fewer maintenance charges compared to a ULIP. With an MF pension plan, you have to pay only fund management and exit charges when you surrender your investment.

With ULIPs there is a bevvy of charges including fund allocation charge, administration charge, fund management charge and fund switching charge. All these charges eat away your investments and consequently reduce the return on your investment.

Direct Mutual Funds available on Bajaj Markets eliminate the need for brokers and distributors thus allowing investors to save the money paid on commissions.

• Return on investment (ROI)

Historically speaking, mutual funds have outperformed ULIPs by an average of 1-4% on an annual basis over a five year period. Even after the introduction of long-term capital gains tax (LTCG), mutual funds have still offered better returns than ULIPs. See the historical chart below for details. 

Choosing Between a Mutual Fund Pension Plan & ULIP

It is easier to decide on the right investment tool if you start with an investment objective and horizon in mind. To make the decision-making process easier for you, here are a few pointers that you can use.

A Mutual Fund Pension Plan is suitable for you if:

• You have a medium-term or long-term investment horizon

• Have a pure investment objective

• You already have a term insurance policy

• Desire high liquidity and no lock-in period

• You have a medium to high-risk appetite

A ULIP is suitable for you if:

• You have a long-term investment horizon

• You want life cover along with wealth accumulation

• Your risk appetite is low to medium

• You are looking for tax-saving tools

Documents & Eligibility

The following Know Your Customer (KYC) documents are required to open a Mutual Fund Pension Plan account available on Bajaj Markets:

• Identity Proof: PAN card | Aadhar card | Driving licence | Voter ID

• Address Proof: Aadhar card | Passport | Driving licence | Voter ID | Electricity bill | Gas bill | Telephone bill | Property deed | Ration card

Bajaj Markets also provides online verification using a video to verify the customer’s identity as per RBI guidelines. As all the process of investing in a mutual fund is done online, customers also have to provide a selfie, photograph of PAN card, a photograph of your address proof and a cancelled cheque.

With Bajaj Markets you can invest in zero commission mutual funds for high returns and get detailed portfolio summaries and insights into the performance of your investments. Mutual funds available on Bajaj Markets have high Morning Star ratings and you can get exclusive offers based on your risk profile and investment goals.