Mutual Funds and LIPs are two investing alternatives with benefits and drawbacks. Investors have free discretion over selecting options based on their financial objectives and demands. Let’s thoroughly examine and compare both investment options to help an investor make a good and educated decision.
What are Unit Linked Insurance Plans (ULIPs)?
Programs called ULIPs, or unit-linked insurance plans, combine the advantages of investment with insurance. This investing and insurance plan safeguards the insured’s family in the event of their untimely passing away while also assisting in wealth growth. It is, without a doubt, becoming quite popular these days and is regarded as one of the best investment sources for investors willing to take on moderate to high risk. The estimated value of your ULIP investment can be calculated using a ULIP calculator based on the premiums, tenures, and other information you enter.
Two portions make up the investment amount in the ULIP:
- The cost of life insurance is included in the premium.
- The remaining premium is invested in debt and equity funds to generate gains.
The amount financed in a ULIP can be determined based on the investor’s financial objectives.
What are mutual funds?
Since more investors choose this choice to invest their money in the market, mutual fund investments are soaring these days. Depending on the investor’s financial situation, investments in mutual funds can be made using either the SIP (Systematic Investment Plan) technique or the lump sum approach. If a potential investor has some cash on hand, they can choose between the following options:
- Use the lump sum method to invest their entire portfolio at once in the mutual funds of their choice.
- They might choose the SIP investing option and make regular investments at their convenience.
Mutual Funds and ULIPs (Unit Linked Insurance Plans) each have advantages that should not be compared. Nonetheless, choosing between these two investment options can be confusing for investors. This brings up the most frequently asked query.
Which Is Better: Mutual Funds or ULIPs?
Mutual Funds and ULIPs both provide their investors with unique advantages over one another. Let’s examine the benefits of both investing strategies to determine their key distinctions.
Advantages of ULIPs:
- It combines insurance with investment.
- No other plan in India offers the investor a twofold benefit.
- It usually has a 5-year lock-in period, which aids in future financial planning. After the lock-in period is over, partial withdrawals are permitted.
- The Income Tax Act of 1961 offers ULIP tax benefits.
- It provides investors with a simple means of switching between funds.
- It enables portfolio diversification for investors, which is beneficial in the long run.
- Flexibility to reroute future premiums to the investor’s preferred funds.
- If the investor passes away suddenly, a guaranteed sum promised is given to the nominee.
- Provides substantial returns as well as long-term benefits.
- Unlike mutual funds, which are solely investment goods, ULIPs are investment and protection solutions.
- Unlike mutual funds, which have an expense ratio cap of 2.5%, ULIPs feature policy administration charges, premium allocation charges, mortality charges, and fund management expenses.
* There are two tax regimes in India – new and old. Choose the correct one after consulting an expert to get the desired tax benefit. You can opt for a regime change during the next financial year.
Benefits of mutual funds:
- Withdrawals from mutual funds are flexible.
- The investor can access liquidity of funds whenever it is convenient for them.
- Money can be invested in low-risk and high-risk funds, which helps diversify a portfolio.
- The management of the money by the fund manager is crucial to the development of the fund.
- A 3-year lock-in period must be followed, particularly when choosing tax-saving funds.
- Involves a simple investment plan and reasonable returns.
- The only funds that are exempt from taxes are ELSS funds.
- Mutual fund investments can be made simultaneously in several different funds.
The ULIP calculator is a simple tool that you can use to predict the return you might get at maturity by entering a few details.
Considerations before choosing between ULIPs and Mutual Funds:
The following are the main factors you should take into account before selecting any investing option:
- The future potential of the investing plan
- Gains from investments.
- The freedom an investor is given to exercise when making an investment
- Available ULIP tax benefits
- Transparency in the spending of monies
- Risk management is required
Mutual Funds and unit-linked insurance plans have advantages and disadvantages, but the investor’s financial situation and backup determine the best option. Before investing for greater returns, one should consider their risk tolerance, financial situation, and risk profile. Before moving further, an investor must make a prudent investment decision.
