Investing in the future is an important headache to have. While there are quite a few instruments to opt for, nothing is as popular as ULIP and Mutual Funds. Having been made more prevalent by the Millennials, both these plans often seem identical to novice investors when they are not.
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In the subsequent sections, we shall compare ULIPs and Mutual Funds, based on the factors of importance. However, before proceeding any further, it is important to gain a brief perspective of a ULIP and a mutual fund, as standalone investment instruments.
Unit Linked Insurance Plan (ULIP) doesn’t exactly sound like a good investment plan. However, as the latest financial product, it comes with several advantages, including decent returns, tax benefits, and a balanced portfolio, comprising bonds, debt instruments, and even equity shares.
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A mutual fund requires no introduction. In simpler terms, it is more of a comprehensive trust, segregated further into debt and equity financial instruments.
Having a good knowledge of personal finance is quite important for selecting a good investment instrument. And, the discussion about ULIP vs. Mutual Fund hinges on several factors, which include –
ULIPs aren’t persuasive enough if generating returns is your primary objective. As a ULIP also secures your well-being with a camouflaged insurance plan, the returns often suffer. Mutual funds, on the other hand, promise higher returns. Also, the size of the probable returns seems bigger for equity-driven funds as compared to specific debt-based mutual funds.
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Mutual funds are quite open regarding the portfolio-specific charges, appreciation rates, and even the way the invested funds are faring. While even a ULIP tries to be transparent, being a mix of an investment strategy and a risk-based fund doesn’t exactly summon openness regarding asset allocation and underlying expenses.
As ULIPs are more like insurance products, the lock-in periods are slightly rigid. A standard ULIP lock-in period is anywhere between 3 years to 5 years. Mutual funds can be liquidated only after a year, barring the likes of ELSS that need to be invested in for a minimum of three years.
If you are planning to invest with tax benefits in mind, ULIPs are better bets. Once invested, you can claim deductions amounting to 1.5 lakhs per year, as per Section 80C. However, mutual funds only offer similar perks if ELSS is the investment instrument in play.
Mutual funds are devoid of risk covers as they are only focused on offering higher liquidity. ULIPs, on the other hand, are comprehensive plans with an integrated insurance plan to serve you right. However, the risk cover for the same depends on the premium value that you are willing to pay.
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Finally, ULIPs have no fixed charges and expense ratio attached to them, making them better choices as long-term investment strategies.
In conclusion, the choice of the investment plan depends on your preferred time frame, tax-saving inclinations, risk appetite, and more. However, ULIP seems like a more balanced investment strategy, especially for the new investors and if you are one, purchasing the most appropriate ULIP from a good insurer is the way to go.
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