Mutual Fund or ULIPs-The balancing act of asset allocationAug 01, 2019(16:50)
In todays world, as an investor you have several investment options to choose from. Some are traditional investments that have been used across generations while some are relatively new options that have become quite popular in recent years. Likewise, if you even see the growth of financial markets, there are a lot of new strategic and customized products that are being offered to individuals based on their risk profile and risk appetite. With so many products in line, it becomes difficult at times for an investor to choose the right investment product which suits his/her current profile and needs. Thus, before stepping towards the investment line up, it is important that one has to understand the investment objective and features of the product. Ideally, the selection of the product should be based on the risk appetite, return expectations from it, time horizon and the accumulations & distributions of returns at different stages of life.
With this, the most commonly asked question among the investors is whether to invest in mutual funds or ULIPs. The important thing to note about these products is that they both work on the principle of unit allocation, however, the strategic investment decision, product features and the other factors associated with the markets make mutual fund and ULIP different investment products. This article aims to help investors make an easy investment decision by giving detailed insights about mutual fund and ULIP.
Mutual Funds are one of the most popular investment options these days. Many investors are investing in mutual funds as an additional tax savings instrument or investing for retirement corpus or to achieve their financial goals. In mutual funds, the money collected from different investors is invested in different securities-based on the investment objective which could be either equity or debt. On the other hand, ULIPs (Unit Linked Insurance Plans) are insurance policies that offer investors an insurance cover as well as generate returns just like mutual funds based on different investment avenues. Both mutual funds & Insurance company similarly float a new scheme to allow investors to invest money in the schemes. There are few points of differentiation between these two investment products which are explained below:
- Investment return –Both mutual fund & ULIPs with higher exposure towards equity will have the potential to generate higher returns while funds having maximum exposure towards debt may offer slightly lower returns. So, based on the type of investment whether equity or debt, the return varies in both these investment products.
- Associated Cost –FMC (Fund Management Charge) is approximately 2.5% in case of mutual funds for equity funds whereas in ULIP, the charges are in the range of 1.25 to 1.5%, however, being an insurance product, mortality and other cost added to it is based on the insurance cover opted in the product.
- Lock-in period - ULIP being an insurance product, the insurance companies define a lock-in period before which the investment cannot be liquidated. ULIPs have a lock-in period of 5 years whereas a mutual fund does not carry any specific lock-in period except for tax-oriented funds and some debt oriented mutual fund schemes.
- Insurance risk cover - ULIPs come with an in-built insurance plan that offers the sum insured and it is based on the investor or the proposer. But in case of mutual funds, there is no risk cover by way of insurance. You need to buy a separate insurance plan and pay an additional premium for the same.
- Taxation - When you invest in ULIP, all the investment made in such plans get exempted from income tax up to the amount of Rs. 1.5 lakh U/S (80)C whereas in case of mutual funds, exemption is given only to certain kind of funds such as ELSS funds. Taxation on maturity or redemption from equity mutual funds will be taxed as per the long term or short term capital gains slab rates. However, in case of ULIP plan, if sum assured is more than 10 times of the yearly premium, the total maturity amount on maturity becomes tax-free U/S 10(10)D.
- Lifecycle Strategy - Mutual fund has plain vanilla investment style of generating returns which is at the discretion of fund managers and is not linked to any lifecycle-based investment whereas in ULIPs, most of the plans offer lifecycle-based investment where the percentage of allocation will change based on the age of the investor as this product can be invested for a period of above 10 years also.
- Premium holiday option – Some plans in ULIPs give an option of holiday premium to its investors whereas in case of sudden demise of an investor, the plan gets covered under insurance policy where the benefits are still continued even if the premium is not paid in future. In case of mutual fund, the entire surplus is paid to the nominee which may or may not help in achieving the individuals financial goals as targeted while making the investment.
The above information provides the comparison of Mutual Funds vs. ULIPs. So each of the products has its unique features that are different from each other. Thus, an investor has to evaluate the importance of his investment stage whether its accumulation or distribution phase to select the right investment products based on financial goal objective.
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