Long-term investment planning plays a vital part in ensuring your financial stability. However, it can be quite challenging. Many people are often confused between two investment avenues, Unit-Linked Insurance Plans (ULIPs) and mutual funds. If you find it hard to decide which choice is better for your future, read on.
What is a ULIP?
ULIPs combine investment and life insurance cover to offer comprehensive monetary security. If an unfortunate event leads to your absence, the insurance provider uses the life cover to provide your nominees with the death benefits. On the other hand, investment funds create wealth, which you receive either when the policy matures or your nominees get it along with the death benefit. Now that you know the ULIP meaning, read on to understand what mutual funds are.
What is a mutual fund?
Mutual funds use investments collected from multiple institutions and individuals and put the money in bonds and stocks. Professional fund managers administrate mutual funds to ensure high returns while mitigating the risk. While mutual funds are popular as investment instruments, they do not offer any life cover like ULIPs. You can compare the possible mutual fund and ULIP returns in 10 years or a longer period to determine which will benefit you more. However, you also need to check certain other aspects.
Here is a list of factors to help you determine which investment option is more suitable.
1. What they offer
ULIPs use your premium to invest in equity, debt, or a mixture of both types of funds as per your risk-taking ability. With ULIPs, you enjoy the dual benefits of the death benefit and wealth creation.
Mutual funds use your investment to create wealth by putting the money in broader financial markets. For example, an equity index mutual fund invests the money in different stocks under a particular index. The return from that mutual fund depends on how the stocks perform.
2. Tax benefits
Section 80C of the Income Tax Act, 1961 allows you a tax deduction of up to INR 1.5 lakh on your investment towards all ULIPs. Additionally, Section 10(10D) of the Income Tax Act, 1961 makes the maturity benefit from ULIPs tax-free.
Conversely, only Equity-Linked Savings Schemes (ELSS) mutual funds offer the same benefit. However, here, you need to pay 10% Long-Term Captial Gains (LTCG) tax if your ELSS returns exceed INR 1 lakh in a year.
3. Charges
You have to pay specific charges for both ULIPs and mutual funds. For the latter, you pay fees for administration and fund management, but ULIPs require additional fees such as mortality charges and premium allocation charges, among other costs. You can use a ULIP return calculator to compare your total cost and the potential return to determine if it is more profitable for you.
Keep in mind that even though ULIPs may cost more than mutual funds, they offer the additional benefit of a life insurance policy.
4. Financial goals
Your financial objectives determine which product you should purchase. If you want to invest in a short or medium-term instrument, a mutual fund will benefit you more, as ULIPs have a five-year lock-in period. For long-term investment goals, ULIPs will serve you better. With ULIP returns in 10 years or longer, you can accomplish important life goals.
5. Risk tenacity
Your risk appetite is the amount of risk you are willing to take with your investments. Both ULIPs and mutual funds allow you to choose the funds, such as equity or debt, for investments. However, only ULIPs will enable you to switch between the funds if your risk-taking capability changes, ensuring more security.
Your financial aspirations determine if you should invest in mutual funds or ULIPs. However, with the additional benefits of long-term investment and life insurance cover, a ULIP might be a smarter investment choice. You can use a ULIP return calculator to compare among different policies and find a suitable one.
