Confused between ULIPs and mutual funds? Read this to know about how ULIPs are better than mutual funds
This is why I prefer ULIPs over mutual funds
Investors are continually seeking new methods to invest in order to build wealth over time. Investing is simple in itself, but deciding where to invest is challenging. This post will explain what is the meaning of ULIP and distinguish between two seemingly identical investing options: mutual funds and unit-linked insurance policies or ULIP plans.
What are ULIPs?
The meaning of ULIP plan is that they are among the most recent financial instruments available to investors. Unit-Linked Insurance Plans are insurance plans that provide investors with insurance coverage while also producing income via different investments. In a manner similar to mutual funds, the insurance company launches a new plan and encourages investors to participate. ULIPs invest in stocks, bonds, and debt securities.
What are Mutual Funds?
Mutual funds are now one of the most popular investing solutions. They are basically a trust in which funds from individual and institutional investors with a shared goal are pooled and invested in a range of stock and debt securities.
How ULIPs are Better Than Mutual Funds?
These two alternatives may seem similar at first glance, yet they are not. There are numerous distinctions between these two investing alternatives. The following are some key distinctions between ULIP plans and mutual funds:
1. Tax Benefit
There are two tax advantages that are normally available in every financial product. One is the advantage of tax deductions under various provisions of the Income Tax Act on the amount invested. Two, there are little or no taxes on maturity proceeds and capital gains.
ULIPs check both boxes. Premiums paid for ULIPs are deductible under Section 80C, and all maturity profits are tax-free under Section 10. (10D).
However, under the newly proposed Budget, this second tax exemption would no longer be available for a ULIP plan with premiums above Rs 2.5 lakh per year. The maturity amount for these ULIPs will be taxed similarly to equity mutual funds. In these circumstances, the maturity from the insurance would be taxed at 10% on profits exceeding Rs 1 lakh. This adjustment will take effect February 1, 2020, and will only apply to the new ULIP plan purchased.
Except for ELSS, no other Mutual Fund type is eligible for a deduction under Section 80C of the Income Tax Act. So, if you just invest in ELSS Mutual Funds, you may lower your taxable income by Rs. 1.5 lakh. ELSS capital gains, on the other hand, will be taxed similarly to equity funds.
2. Lock-in Period
A ULIP plan has a 5-year lock-in duration. This is comparable to other Section 80C tax-saving alternatives, such as National Savings Certificates or tax-saving 5-year fixed deposits. However, when compared to Mutual Funds, 5 years seems to be a lengthy time.
Most mutual funds have no lock-in period, which means you may redeem your units whenever you choose. There are two exceptions to this rule. One, the lock-in period for ELSS or tax-advantaged mutual funds is three years. Two, there are certain solution-oriented mutual funds, such as a Children’s fund or a Retirement fund, with a 5-year lock-in period. However, the majority of mutual funds have no lock-in time, whilst all ULIP policies have a 5-year lock-in period.
So, if you have a short-term aim of 1-2 years, ULIPs are never a good idea. Only ULIPs should be considered if your objective is at least 5 years away. Mutual Funds, on the other hand, may be invested in for periods ranging from one day to many years or even decades.
3. Life Insurance Cover
ULIPs have life insurance coverage as standard. ULIPs, in addition to investment rewards and tax advantages, provide life insurance coverage. As a result, ULIP plans are a triple-benefit financial instrument.
On the other hand, mutual funds are merely an investment product with no insurance built-in. Certain Mutual Fund firms have recently introduced free but limited insurance coverage for some of their schemes.
These are given as a group insurance cover, but they are few and far between, and they often come with several restricting criteria such as the duration of the SIP, a maximum amount insured, limits such as no interruption in the SIP, and so on.
As a result, as a mutual funds investor, you will need to get life insurance on your own. Consider a term insurance plan, which provides extremely high coverage for very modest costs.
4. Loyalty Benefits
Mutual funds provide no loyalty rewards to unitholders. On the other hand, the new-age low-cost ULIP plan has included policyholder loyalty perks. These are extra units given to policyholders who continue with the fund for a longer period of time, such as 5 years, 10 years, or more.
This is done to guarantee that policyholders stay invested for an extended period of time. As a result, the loyalty incentive effectively serves as a retention strategy. The amount and timing of the loyalty bonus will be specified in the benefit illustration provided to you by the insurance company or your insurance agent. Please read everything thoroughly and don’t hesitate to ask questions if you have any.
5. Transparency
Mutual funds and ULIP plans have both raised their transparency levels over the years. Mutual fund firms and insurance companies, for example, both provide daily NAVs that may be viewed on their respective websites. Every month, both provide a fact sheet that covers the fund’s performance, holdings portfolio, benchmark returns, volatility score, fund management data, etc.
In terms of fees, the Mutual Fund scheme’s TER, or total expense ratio, is provided to unitholders regularly. Similarly, with the ULIP plan, each policyholder is equipped with a benefit illustration that includes a projected cash flow statement and a breakdown of each fee so that the potential investor knows what they are purchasing.
Wrapping It Up
It all comes down to what your needs are. If you want a long-term investment option, don’t mind lock-in periods, and don’t have a separate life insurance policy, the ULIP plan is the preferable alternative. However, if you already have a life insurance policy and want to invest for short-term or long-term returns, mutual funds are a suitable alternative.
We hope you understand the meaning of ULIP plans and why they’re better than mutual funds. At the end of the day, it is completely a personal decision and differs from person to person.
