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There are times in life when a large amount of money is needed. Purchase or construction of a home, higher education and marriage of your children, and retired life are examples of these. You must define the avenues where your investment can produce the highest returns as per your risk profile, taking into account the rate of inflation.
The stock market has the potential to offer the highest returns of all investment options, but it also comes with a high level of risk. There are a number of ways to invest in the stock market while keeping your long-term objectives in mind. Mutual funds and ULIPs are two of the most common investment options.
ULIP vs Mutual Fund
These two choices can appear to be similar at first glance, but they are not. These two investment options have a number of distinctions. Some of the main differences between ULIPs and mutual funds are as follows:
- Return on investment
The ULIP returns are on the lower end of the scale. The explanation for this is that ULIPs guarantee a fixed amount regardless of whether or not the investment strategy is profitable. Mutual fund returns, on the other hand, vary depending on the risk factor. Although equity mutual funds have the potential to provide higher returns, debt mutual funds have the potential to provide slightly lower returns.
- Lock-in Period
A ULIP is basically a form of insurance. As a result, insurance firms set the lock-in duration for such an investment, after which it cannot be redeemed. ULIPs have a three- to five-year lock-in cycle, depending on the type and structure of the investment scheme. Mutual funds typically have a one-year lock-in duration, but others, such as ELSS, have three-year lock-in periods.
- Transparency
ULIPs are advanced goods that combine risk protection and investment. In terms of underlying costs and asset allocation, these have a less straightforward structure. Mutual funds are fairly transparent regarding the fees they charge and the assets they keep in their portfolio.
- Taxation Benefits
Investments in ULIPs are eligible for income tax deductions under Section 80C of the Income Tax Act, 1961, allowing you to assert tax deductions of up to Rs. 1.5 Lakhs per year. Mutual funds, on the other hand, only have a tax deduction on ELSS investments. Any other mutual fund scheme will not include tax benefits, and redemptions will be taxed according to the applicable tax bracket.
- Expenses
Low costs and competent management are two advantages of mutual funds. The expense ratio for mutual funds is capped at 1.05 percent by SEBI, but there is no such limit for ULIPs. ULIP scheme fees can be much higher than mutual fund fees.
- Risk Cover
ULIPs have a built-in insurance package that pays the amount assured to the policyholder’s family if the policyholder dies during the policy’s duration. In the case of mutual funds, however, there is no risk cover in the form of insurance. You must purchase a separate insurance policy and pay an extra premium if necessary.
Wrapping Up – ULIP vs Mutual Fund
Mutual funds are a good choice if you’re a short-term or medium-term investor looking for more liquidity but still having a high or medium risk appetite. ULIPs, on the other hand, are better suited to long-term investors who want life insurance coverage and have a moderate risk appetite.
The ULIPs available on Finserv MARKETS should be your top priority if you are thinking of availing one. These ULIPs come with the development of long-term equity, transparency and dual benefits guaranteed. They are investments that are tax-free and come with high returns.
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