ULIP vs MF – Charges, Returns, Taxability and More
We all have different life goals that we want to fulfil. Securing the future of the family, being able to finance the education of children, buying a dream home or starting a business,these are just a handful of goals that we all want to accomplish in our life. However, the common requirement in all these goals is money.
In order to have a financially secure future and be able to fulfil different goals, you need to create wealth. While there are different financial instruments that one can take advantage of for this purpose, ULIP and mutual funds are the most preferred ones. Read more to understand the difference between these two.
What is a ULIP?
A unit-linked insurance plan is a type of life insurance policy. It offers the dual benefits of investment and insurance. The premium that you pay for ULIPs is used for both investing your money in market-linked funds and in providing life cover as well. The market funds that you get to invest in are equity and debt funds. Based on your risk appetite and requirements, you can invest in either equity funds, which are high-risk high returns fund,or debt funds which are low-to-medium risk and medium-return funds.
What is a Mutual Fund?
A mutual fund is a type of investment fund that is handled by an asset management company (AMC). Thethe AMC pools money from various investors and invests that money into different types of equity funds. Mutual funds are quite risky in nature as they are dependent on how the market is performing. Depending on the situation of the market, the returns could be good and lucrative.
What are the key differences?
Listed below are the key differences between ULIPs and Mutual funds:
When you invest in ULIPs, there are different charges that are levied on your plan. Administration fees, charges related to allocation of premium and partial withdrawal charges are some of the charges that are involved in ULIPs. If you wish to have a fund manager handle your funds for you, you will be charged for those services as well. The charges for ULIPs are about 1.35%.
In mutual funds, you will be charged for the management of your funds. An expert fund manager handles all of the investment done in the mutual funds due to the nature of investment. They invest in securities that will help maximise the profits of the investors. The other thing you will be charged for in mutual funds is withdrawal charges before the end of the term. These charges may vary from one AMC to another. In mutual funds, the charges are usually about 2.5%.
The nature of the investments in ULIPs make them quite attractive for many investors. ULIP plans returns depend on where you have invested your money. You have the option of investing in either equity funds or debt funds. Where you want to invest depends on your risk appetite and what your life goals are. Equity funds are stocks of market-listed companies. They carry a high-risk factor; however, they offer good returns as well. Debt funds invest in government bonds, corporate bonds, and other forms of liquid and cash markets. They have a low to medium risk factor with medium returns. This mix of investment offers good and substantial returns.
In mutual funds, the investments are done in equity funds only. As mentioned earlier, equity funds are a high-risk factor. So, if the value of those funds were to fall down to market volatility, the returns you gain would also be less than substantial. Meaning that you could end up earning less than what you intended.
One of the main reasons why ULIPs are so appealing to people is due to the flexibility that it offers to the investors. As an investor, you may want to invest a majority of your money in equity funds to gain quick returns with the remaining portion in debt funds. However, if at some stage, you feel that the market volatility could affect your portfolio, you can change your allocation from one fund to another. This can be done with the help of switching. This option allows you to switch your money from one fund to another to maintain the returns and your profits as well.
Unfortunately, this option is not available in mutual funds. As the investments are done purely in equities, no chance of switching is presented.
The premiums that you pay for ULIPs are tax exempted under Section 80C of the Income Tax Act. The maturity benefits are tax exempted under Section 10(10D).
On the other hand, 10-20% tax is levied based on the type of gains and the type of mutual fund. Only ELSS, which is a type of mutual fund, is eligible for tax exemption on premium payments under Section 80C of the Income Tax Act.
These are some of the major differences between ULIPs and mutual funds. If you are planning on investing in ULIPs, you can use the ULIP calculator to get a better idea about what kind of plan would suit you.