Being a good investor depends on the quality of information an investor has gathered. So here we aim to provide you in-depth analysis of the two lucrative investment options namely ULIPs (Unit-linked Insurance plans) and Mutual funds.
Let’s start with the explanation of what exactly is ULIPs, Unit-linked insurance plans are often sold as dual benefit schemes to the investors as the part of the fund is locked in for insurance and the other is invested in debt and securities. Here the policyholder has the right to choose the investment mix based on their risk calculations and priorities hence this is investment + insurance whereas mutual funds are considered as one of the most attractive investment plans which accumulate funds from different investors and then the collected funds are invested in different stocks and assets for earning quality returns.
Mutual funds provide only investment benefits for short, medium as well as long term. However, from the past few years, ULIPs have gained lots of interest from the investors who are aiming for long term savings as well as security for their family or even for themselves during retirement.
Let’s elaborate it with a simple example.
Mr U invests Rs 10,000 in a ULIP which provides insurance cover of 1,00,000 and part of this amount is also invested in stocks which will fetch profit after maturity, Whereas Mr M has invested the same amount in mutual funds which does not provide any life cover or protection to the Mr M’s Family.
Terms and Conditions
The ULIPs are good for the investors who are looking for long term investment as they have a lock-in period of 5 years whereas mutual funds are liquid. Here the funds or the maturity amount will be provided to the policyholder whichever is higher. In case of mutual funds, the profit is earned immediately as there is no lock-in period except ELSS (Equity linked saving scheme) where the lock-in period is 3 years.
Is ULIPs. providing Tax benefits?
The ULIPs and Mutual funds have been compared various times in the context of tax redemption as ULIPs maturity amount was tax exempted under section 10D(D) of Income Tax Act till the premium is 10% of the sum assured if any amount in any year whereas mutual funds have no such benefits. Nonetheless, according to budget 2021, ULIPs will lose this privilege as the policy earned sum will be considered as capital gain and this sum will be taxable if the premium paid exceeds Rs 2.5 lakh in any year. The HNIs (High net worth individuals) have taken advantage of the previous provision by investing huge sums in ULIPs to enjoy the tax benefits but now the investors will have tax parity between ULIPs and Mutual Funds.
It is really important to point out that ULIPs have been mis-sold majorly by banks and large financial institutions among investors as they are sold as mutual funds. The investors get attracted to the product due to misleading free insurance cover (which is not the case) and poor information regarding lock-in period. This also concludes that an investor’s poor education is one of the reasons for the mis-selling of ULIPs.
Premiums, Expenses and Miscellaneous Charges
The ULIPs can be more costly than the mutual funds in the early years of the investment. Also, the mutual funds involve only one expense and ULIP involves various charges including premium allocation charges, mortality charges, fund management charges, partial withdrawal charges, premium reduction charges and policy admiration charges etc. In the above-mentioned charges, some charges are charged on a monthly as well as a daily basis, as from a millennial point of view it is too clumsy to track and keep a record. Even the switching of ULIP to another investment plan of a different company or insurance plan is not as easy as in comparison to mutual funds as it involves lots of charges and even the insurance cover is also affected which is not the best decision for your loved ones. So, Investors might feel stuck if the purchased ULIPs are not performing well. This shows that Mutual funds provide more flexibility for investors.
Comparison and Analysis
Although the first ULIP was launched in 1971, the analysis of ULIP is quite difficult due to changing norms and rules for ULIPs when it comes to Mutual funds the comparison and decision making is easy for the investors as the investor can choose any mutual fund according to their goals and requirements. The ULIPs also provide a different type of mutual funds which can fulfill the need of the investor whether it is child education or any other family responsibility. Hence ULIP is profitable if the goal is long term wealth creation which does not provide liquidity to the investors.
The above comparison of both the products will help in deciding which is better. The investors should go for mutual funds as they help in creating wealth creation fastly and you can always buy good term insurance for life cover. ULIPs provide advantage only if it continues till maturity. Hence the decision depends on your investment goals as well as your family needs and risk appetite.