ULIP vs Mutual Fund – Where should I invest?

A very com­mon ques­tion among investors which instru­ment is bet­ter – Ulips or Mutual Funds. Before you start think­ing which instru­ment to invest, let’s first under­stand these two finan­cial instruments.

What are ULIPs – Unit Linked Insur­ance Plans

Pop­u­larly known as “ULIPs”, it is an invest­ment option pro­vided by Insur­ance Com­pa­nies. It is a sin­gle con­tract com­pris­ing of insur­ance cover with an invest­ment ben­e­fit. The insur­ance com­pany allots units to the ULIP investors and the net asset value (NAV) is cal­cu­lated and declared on a daily basis. An invest­ment in ULIP is divided into two parts – a) Life Cover Pre­mium b) Invest­ment. Pre­mium paid in ULIP, cer­tain por­tion goes for life cover and the remain­ing por­tion goes for investment.

What is a Mutual Fund

Mutual Fund is an invest­ment instru­ment which pools money from many investors and invest in (stocks, bonds, money mar­ket instru­ments). The mutual fund com­pany allots units to the mutual fund investors and the cur­rent value of such invest­ments is cal­cu­lated on a daily basis and the same is declared through the Net Asset Value.

ULIPs vs Mutual Funds

The basic dif­fer­ence between ULIP and Mutual fund is in terms of insur­ance cover. A ULIP pro­vides a insur­ance com­po­nent whereas a mutual fund is a pure invest­ment prod­uct. Gen­er­ally speak­ing, ULIPs are mutual funds with an insur­ance cover.

ULIP = Mutual fund + Insur­ance cover

Now after under­stand­ing the dif­fer­ence between ULIP and Mutual funds, let’s under­stand in detail which is bet­ter invest­ment option – ULIP or Mutual Funds.

Para­me­ters for com­par­i­son — ULIPs vs Mutual Funds

a) Ulip vs Mutual Fund — Expenses

Expenses incurred in a Mutual Fund is lesser than the expenses of ULIPs. The rea­son is expenses in a mutual fund is capped, there is a pre-set upper limit, whereas for ULIPs no upper limit in terms of con­trol­ling the expenses is set by the insur­ance company.

b)Ulip vs Mutual Fund — Tax benefits

Any invest­ment made in ULIP qual­i­fies under sec­tion 80C of income tax act, where an investor can save tax on Rs 1,00, 000. In case of mutual funds, only invest­ment in ELSS (equity linked tax sav­ings scheme) a spe­cific type of mutual fund scheme qual­i­fies for tax ben­e­fits under sec­tion 80 C.

c)Ulip vs Mutual Fund — Port­fo­lio disclosure

Mutual fund houses are required to statu­to­rily declare their port­fo­lios on a quar­terly basis, how­ever there is no such statu­tory require­ments for ULIPs.

d)Ulip vs Mutual Fund — Return on investment

As both the prod­ucts are long term invest­ment prod­ucts, these prod­ucts have given good returns to its investors. Many ana­lysts’ feels, from a long term view ULIP pro­vides bet­ter return than mutual funds. How­ever this is not true in all cases, it all depends on the type of invest­ment and the fund manager’s skills in man­ag­ing the funds.

Con­sid­er­ing all the above fac­tors, a mutual fund invest­ment is bet­ter than ULIPs.

Insur­ance is meant for your future pro­tec­tion and it takes care of uncer­tain­ties in the future. How­ever a mutual fund is meant for only invest­ment. As we investors do not have the exper­tise to invest in the stock mar­ket and other finan­cial instru­ments, through mutual funds it is possible.

What is the best invest­ment option? — ULIP vs Mutual Fund

The best invest­ment option avail­able for any­one is — A low-cost term insur­ance (Insur­ance) and the remain­ing amount should be invested in a diver­si­fied equity mutual fund.

Related posts:

1. ULIP poli­cies in India – An Analysis
2. ULIP vs Fixed Deposits – Which to choose?
3. ULIP – Every investor should know this information
4. ULIP – Under­stand the jar­gon before investing
5. ULIP expenses — Do you know?