Out of the many investment products offering investments in the stock markets, ULIPs and mutual funds are two of the most popular options. So, what difference does it make if you choose any of these financial products when both products invest in stock markets? Well, a lot.
Unit-Linked Insurance Plan (ULIP)
ULIP is an insurance policy that invests a portion of the policy premium into market-linked products, and the other part goes towards providing insurance coverage to the policyholder.
Mutual Funds
Mutual fund is an investment product that invests the entire amount of the investor in various equities and debt instruments with the aim of providing a significant return. They don’t provide any insurance coverage.
ULIP vs Mutual Fund
Comparing the different parameters of ULIP vs mutual fund can help you better understand which one can work better for you.
Lock-in Period
The post-investment period in which investments can’t be sold or redeemed is called the lock-in period. ULIPs usually have a lock-in period of five years.
Mutual funds usually do not have any lock-in period. However, tax saver mutual fund schemes typically have a lock-in period of three years.
Tax Benefits
ULIP investments are eligible for tax deduction up to ₹ 1,50,000 in a financial year under Section 80C. You can also claim tax exemption on the sum assured and accrued bonus (if any) under Section 10(10D), provided that the aggregated premium amount hasn’t exceeded the limit of ₹ 2,50,000 lakhs in any year during the entire policy tenure.
In mutual funds, only ELSS come with tax deductions under Section 80C, just like ULIPs. Apart from that, gains made from mutual funds come with some tax benefits. For instance, long-term capital gains in equity funds up to ₹ 1,00,000 a year are tax-free.
The Flexibility of Switching and Rebalancing
ULIPs provide greater flexibility to policyholders by allowing them to move units from one fund to another. The policyholder can manually allocate funds or opt for automatically rebalancing the investment portfolio based on the individual’s age or risk appetite.
Mutual funds don’t offer such flexibility. So, if mutual fund investors want to rebalance their portfolio, then they must sell some units of their existing fund and invest them into another fund.
Loyalty Benefits
Mutual funds don’t provide loyalty benefits to their unitholders irrespective of the investment tenure. On the other hand, ULIPs offer loyalty benefits to their policyholders. These benefits can be in the form of additional units allotted to the policyholders if they stay invested in the ULIP for a long period, say ten years or more.
The amount and frequency of the loyalty benefits may vary depending on the insurance provider.
Which One Is Best?
Mutual funds are best suited for you if you want high liquidity in your investments. However, if you are willing to invest for the long term with adequate insurance cover to protect your loved ones, then you should consider investing in ULIPs.
There is no clear winner when ULIP vs mutual fund returns are compared. Both have their own set of advantages. Therefore, you must decide which one works best for you as per your risk appetite and personal financial goals.
Visit here to know more about Kotak Life ULIP Plans: https://www.kotaklife.com/online-plans/ulip-plan
