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People have different reasons for investing, depending on their financial goals. In India, there are many ways to invest money to grow wealth and ensure financial security for the family. However, picking the right investment can be confusing at times.

 

One common dilemma for investors is choosing between Unit-Linked Insurance Plans (ULIPs) and Systematic Investment Plans (SIPs). So, before making any decisions, it's important to know what these terms are.

Understanding SIPs

A Systematic Investment Plan (SIP) is a way for people to invest in mutual funds. Through SIP, you regularly invest a specific amount of money in a chosen mutual fund account. You can make these payments monthly, quarterly, or yearly based on your convenience and financial plans.

 

Some benefits of investing in SIP include:

  • Hassle-free process with no manual payment intervention required.

  • Encourages a disciplined approach to saving money, as the invested amount is automatically deducted from your bank account at chosen intervals.

  • Utilises rupee cost averaging, helping investors navigate market fluctuations and reduce the impact of market volatility.

  • Allows investors to own small units of stocks with just a few thousand rupees.

Understanding ULIPs

A Unit-Linked Insurance Plan (ULIP) is a unique offering that combines investment and life insurance coverage in a single plan. A portion of the premium goes towards life coverage, while the remainder is invested in various market instruments like bonds and stocks.

 

Some benefits of investing in ULIPs include:

  • Provides the dual advantage of investment and life insurance cover.

  • Facilitates the achievement of future financial goals with a five-year lock-in period.

  • Permits partial withdrawal from the investment after completing the lock-in period.

  • Offers tax benefits under both the old and new income tax regimes.

Difference Between ULIP and SIP

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

 

Unit Linked Insurance Plan (ULIP)

Systematic Investment Plan (SIP)

Type of Policy

ULIP investments offer life insurance as well as investment benefits

SIP is solely an investment plan

Type of Investment Mix

With ULIPs, you can invest in equity, debt, and hybrid funds

SIPs are majorly equity-oriented funds

Life Cover

ULIPs offer life insurance coverage benefits

SIPs does not offer any insurance benefits

Lock-In Period

ULIPs have a minimum lock-in period of five years

For ELSS mutual funds, the lock-in period is three years, while there is no lock-in period for other open-ended schemes

Tax Benefits

You can avail income tax deductions on the premiums paid under Section 80C of the Income Tax Act, 1961.

Also, the maturity amount is tax-free under Section 10(10D)

Note: 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.  

Tax benefits are not applicable for SIPs. However, investments made in ELSS mutual funds can be claimed for deductions of up to  ₹ 1.5 Lakhs under Section 80C of the Income Tax Act, 1961

Withdrawal Options

You can make partial withdrawals after completing the lock-in period of five years

The capital amount invested can be withdrawn. However, money invested in ELSS mutual funds can be withdrawn only after completing three years

Additional Benefits

You gain loyalty benefits after completing the determined time period, and additional fund units are also issued under your plan

No additional benefits are provided

Flexibility

With ULIPs, you have the flexibility to decide what portion should be invested and what goes towards life insurance

Moreover, you also have the liberty to switch between the funds (equity to debt and vice versa), depending on your market performance

Here, you can increase or decrease the invested capital amount to gain long-term returns on the same

However, there is no option to switch between the funds chosen

Liquidity

There is no liquidity until the completion of the five-year lock-in period

Moreover, you cannot surrender the policy during this time

It provides full liquidity on the invested capital amount as per your convenience.

Policy Regulated By

Insurance Regulatory and Development Authority of India (IRDAI)

Securities and Exchange Board of India (SEBI)

Fund Management Charges

1.35%

2.50%

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 unit linked insurance plans and mutual funds:

1. Benefits

ULIPs stand out by providing a life cover, a feature absent in Mutual Funds or SIPs. In terms of investment, both ULIPs and Mutual Funds function similarly.

2. Risk

Mutual Funds, being purely investment-based, carry higher inherent risks. In contrast, ULIPs, rooted in insurance, offer a built-in sense of security.

3. Tax-Savings Features

While only Equity-Linked Saving Schemes (ELSS) in Mutual Funds qualify for tax benefits under Section 80C, ULIPs provide exemptions on the premium paid. ULIPs also enjoy exemption from Long-Term Capital Gains (LTCG) tax, distinguishing them from Mutual Funds.

4. Fund Management Charges

SIPs in Mutual Funds have a 2.50% charge, comparatively higher than the lower 1.35% charge for ULIPs. Staying informed about associated charges is crucial for both options.

Conclusion

When aiming for near-future financial objectives, choosing between Systematic Investment Plans (SIP) and Unit-Linked Insurance Plans (ULIPs) becomes crucial. Prior to deciding, a thorough assessment of your current financial status and investment goals is necessary.

 

For those with a focus on long-term investment or wealth creation, ULIPs prove to be a suitable choice. The accrued maturity benefits can be used strategically for various financial milestones like a child's education, marriage, personal retirement, or other specific goals. Bajaj Markets offers secure and affordable ULIP plans, making them ideal for first-time investors. Tailor your plan choice to align with your unique financial goals and timelines for a personalised and effective wealth creation approach.

FAQs

What is the right time to invest in ULIPs?

Much like mutual funds or SIP investments, any time is a good time to invest in ULIPs. With a ULIP, you can get dual benefits - life insurance coverage as well as market-linked investments of your choice.

How can I determine my ULIP returns?

 You can use the ULIP calculator available on Bajaj Markets to estimate the returns earned over time.

Can ULIPs give high returns?

 ULIP returns depend on the investment component of the policy. As a policyholder, you can choose to invest in equity funds, debt funds, or a combination of the two. The returns solely depend on the market performance of your funds.

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