Difference Between ULIP and Mutual Fund

An investment strategy can help you grow your wealth over time. ULIPs (unit-linked insurance plans) and mutual funds are both attractive investment vehicles for long-term investors. However, it’s important to know that comparing mutual fund investments with ULIPs is like comparing apples with oranges.

In this article, let’s understand what is the difference between ULIP and mutual fund. Moreover, which one is more suitable to you.

What is a Mutual Fund?

A mutual fund is a financial vehicle wherein an AMC (Asset Management Company) manages  the money of several investors. The collected funds are further invested in different securities such as bonds, stocks, and money market instruments, etc. The performance of your mutual fund scheme is directly proportional to the performance of these underlying securities.

Mutual funds pool the investment of many people into one large, complicated package. This is similar to getting on a bus. The driver (fund manager) takes all these passengers to their destination. Here, the driver is the fund manager, the bus is the mutual fund structure, and the passengers are investors. Fund managers have access to expertise in financial markets and can make appropriate decisions about investment opportunities with this knowledge.

Read More: Equity Mutual Funds – Types, Benefits, Taxation

What is a Unit-Linked Insurance Plan (ULIP)?

A Unit-Linked Insurance Plan, or ULIP, is an investment policy and an insurance policy in one. These policies combine to provide you with the potential to create wealth while also giving you the safety of life coverage.

ULIPs are a combination of life insurance and investments. Approved investments can be made in debt instruments resembling equity (bonds), or with a mixture of both to create long-term wealth.

Read More: Difference Between Term Insurance and Life Insurance

Difference Between ULIP and Mutual Fund

1) Return on investment

When choosing a long-term investment, you need to be sure that the amount of return is enough to cover your needs. The returns on ULIPs are usually variable as they invest in both equity or debt and have the potential for higher returns than mutual funds. However, they don’t offer guarantees on minimum returns like mutual funds do.

2) Investment objective

A mutual fund is a pure investment product and does not include any insurance protections. ULIPs, on the other hand, are mainly an insurance product with the added advantage of being a market-linked investment.

3) Transparency

Recent regulatory amendments have made ULIPs quite clear; they now provide upfront information on fund allocation. Mutual funds have been instructed to provide detailed reports of the mutual fund investments. Financial markets regulators have advised fund houses to provide detailed information on asset allocation, portfolio holding, active fund managers, and fees charged.

4) Lock-in period

Insurance products like ULIPs are generally locked in for five years. Investors cannot withdraw their investments before that time is up. Mutual funds on the other hand, with the exception of ELSS funds, generally have no lock-in periods.

5) Taxation

Mutual fund taxes: The LTCG (long-term capital gains) and STCG (short-term capital gains) tax of 10% and 15% respectively, is applied on equity funds depending on the holding period.

Investors in debt mutual funds are taxed at 20% (plus applicable surcharge and cess) on their long-term capital gains. The standard tax rate for equity-linked saving schemes is up to Rs 1.5 lakh under Section 80C of the Income Tax Act.

On the other hand, ULIPs are tax-free under Tax 10(10D) of the Income Tax Act, 1961.

However these rules are subject to change from time to time. You can refer Income Tax for latest rules.

6) Risk cover

Under ULIPs, nominees are compensated for the sum insured in case of the policyholder’s untimely demise. Mutual funds, on the other hand, transfer investments directly to nominees.

7) Expense

Mutual fund investments incur professional management and administration fees, collectively referred to as the expense ratio. Some mutual funds also charge an exit load, meaning they will charge you if you want to leave the scheme. Likewise with ULIPs, they also charge premiums which include allocation charges, fund management charges, administration charges, and mortality rates or fees.

Which is better? Mutual fund or ULIP?

Whether you should invest in mutual funds or ULIPs is your decision. Before investing, analyse the financial needs of your particular situation. The right investment option is one that aligns with the investor’s goals and risk profile. For instance, if investments need to be liquid, a mutual fund would do better than an ULIP because it has no lock-in period; whereas if you plan to use your investment as a form of insurance as well as for long-term wealth creation, an ULIP could work better.

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