Advantages of ULIPs over mutual funds

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Some of the most popular ways to invest in the market are by investing in ULIPs and mutual funds. Both are investment products that further invest the funds collected from investors in the market. However, investors are always in a dilemma when choosing between the two because both seem lucrative to those who are unwilling to invest directly in capital markets yet looking for similar returns. Let’s have a deeper look into these investing instruments.

ULIP – Meaning

Unit Linked Insurance Plans (ULIPs) are schemes structured to offer you insurance protection along with facilitating investments. While a portion of your premium goes to life cover, the remaining is invested in the various market-linked instruments like equity, debt, bonds, etc.

Mutual funds – Meaning

Mutual funds are investment instruments where a fund pools amounts from various investors and further invests the same in various avenues like shares, debt, gold, etc., as per the fund’s goals. It is professionally managed by a fund manager.

How are ULIPs better than mutual funds?

  • Low risk: ULIPs involve lesser risk compared to mutual funds, with some schemes even offering guaranteed returns. This comes as a relief to investors who fear the loss of capital in market-linked investments. They also provide regular income to the family after the death of the policyholder till the tenure of the policy.
  • Insurance: ULIPs are primarily insurance products that provide dual advantages of insurance and investment in a single policy. On the other hand, mutual funds require buying out a separate insurance policy, thereby increasing your cash outflow as you will have to bear insurance premiums separately.
  • Tax benefits: ULIPs offer tax benefits in terms of deduction from your gross total income under section 80C of the Income Tax Act, 1961. The maximum deduction that can be availed is capped at Rs. 1,50,000. While it applies to all the ULIPs, mutual funds offer tax benefits only if you invest in Equity Linked Savings Scheme (ELSS). This restricts the choice of investments in mutual funds.
  • Better for novice investors: Mutual funds come with a wide variety of options. It takes a thorough understanding of markets to identify the best scheme that suits your needs. Also, similar schemes are offered by multiple companies that only raises confusion among investors. Therefore, for those investors who are new to investing or want to shift from traditional investment avenues like fixed deposits, etc., ULIPs may be the best products to begin with as they remove the hassle of searching for the best scheme.
  • Planned long-term investment: ULIPs come with a lock-in period of 5 years. While it may not be convincing to some investors, it offers a real advantage in terms of building discipline for long-term investing. If you are planning to invest for the long term for goals like retirement planning, children’s education, marriage, etc., you could choose ULIPs as, apart from keeping your investments safe, they would restrict you from liquidating your investment and using it for some other purpose.
  • Flexibility: ULIPs are among some of the most flexible instruments in the market. They offer investors an option to switch funds during the tenure of the policy. However, companies may restrict the number of switches that may be allowed during the year. As per your goals and risk appetite, you can switch among various options like equity, balanced, growth, income funds, etc. Your efforts are restricted to choosing from the fund allocation from any of the above categories as the scheme manager takes care of the selection of the companies. On the other hand, in mutual funds, you will have to liquidate your funds to reinvest them in another scheme.

Bottom line

ULIPs are among the best instruments that provide dual advantages. If you want to estimate the returns you can get by investing in ULIPs, you can use a ULIP calculator. By simply entering the amount you wish to invest, the term of investments, the tenure for which you will remain invested, and the rate of returns your scheme provides, any online ULIP calculator will provide you with the returns you could earn on the total amount invested.


David Cohen

Rachel Cohen: Rachel is a sustainability consultant who blogs about corporate social responsibility and sustainable business practices.

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