ULIPs vs Mutual funds – Where should you invest?

Ulios vs Mutual funds

Mutual funds and Unit Linked Insurance Plans (ULIPs) are both market linked products and that is the reason sometimes investors are confused that which one they should choose for investment.

Here is the list of characteristics to be analysed before investing your hard-earned money:

1. Charges Associated

The charge structure of ULIPs makes them a very complex product. On the other hand, the charges of Mutual Funds are easy to understand.

Ulips vs Mutual funds

ULIP – A host of charges including high upfront charges, difficult to understand

Mutual Funds – Only two types of charges, simple to understand. No upfront charges.

2. Tax Savings & Liquidity

The investments under ULIPs are tax-free under section 80C on IT act. The same exemption is available to ELSS mutual funds which are Equity Linked Saving Schemes. However, in ULIPs your money is locked in for 5 years, i.e. even if you surrender your policy before completion of 5 years, your money will stay with the insurance company and you will get it only after 5 policy years are completed.  In ELSS mutual funds, this lock in is 3 years.

ULIP – Tax Saving available, 5 years lock in

ELSS Mutual Funds – Tax Saving available, 3 years lock in

Other Equity Mutual Funds – Tax saving not available, no lock in (exit load of approx 1% till 1 year)

3. Flexibility

If you are unable to pay an instalment of your ULIP, it will lapse and your money will move from your selected fund to a discontinued policy fund which pays an interest rate equivalent to Savings Bank interest rate.

However, in case you do not pay an installment of your SIP in a mutual fund, your money will remain invested in the same fund and will continue to grow.

ULIPs – Less flexible in terms of Premium payment

Mutual Funds – Flexibility of payment available

4. Insurance

ULIPs have the advantage of Life insurance being associated with them. However, maximum Life insurance is limited to 20 times of the annual premium. Hence, if your annual premium is 50 thousand, you will get a maximum cover of only 10 lakhs and there will be mortality charges covered from your premium. Instead of completing your insurance requirements from a ULIP a term insurance is a better, simpler and cheaper option.

ULIPs – Low insurance coverage, high mortality charges

Mutual Funds – No insurance coverage

5. Returns

A detailed comparison can be carried out between Mutual fund and ULIPs showing how much wealth they will create in a specific time period considering their returns are same. In such a comparison, for a long time, say for around 18-20 years, corpus created by a Mutual fund will remain higher and only after 20 years or so, the ULIP corpus will beat it. However, the condition for such a comparison is that the returns from both ULIPs and MFs are same, but in reality it is not so. Let us see returns from ULIP funds and Mutual funds of same companies for similar funds and the picture will be clear.

Ulips vs Mutual funds

Mutual Funds give better returns than comparable ULIP funds.

Mixing up Investment with Insurance is neither advisable nor a prudent choice. As we saw, ULIPs are complex products and for investments Mutual Funds are a better choice which are simpler to understand and have provided better returns. The insurance part can be taken care by a term insurance.

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