There are certain events in life where you may need a substantial amount. This can be for buying a new house, paying your child’s education fees, etc. Considering the growing inflation rate, it is pivotal that you identify the right investment avenue to grow your money and get valuable returns.
If your goal is to get high returns quickly, you may consider investing in the stock market. However, you must know that the risk potential in stock market investment is high. There are other channels through which you can get exposure to investing in the equity market while balancing your long-term goals. Two of the most popular investment options are ULIPs (Unit Linked Insurance Plan) and mutual funds.
If you wonder whether to invest in mutual funds or ULIP, knowing the difference between them will help you make a more informed decision.
Table of Contents
What are mutual funds?
Mutual funds are one of the most popular investments amongst retail investors. Mutual funds are essentially a trust where money from different individuals who have a common investment objective is pooled together and invested in various asset classes such as debt and equity instruments.
What are ULIPs?
ULIPs are one of the most popular types of life insurance policies. It provides dual benefits of life protection against uncertainties and investment opportunities. A part of the premium you pay for ULIP is invested in different asset classes based on our risk-taking capacity and long-term financial goals.
Difference between mutual funds and ULIPs
At first, ULIP and mutual fund investment may seem similar, but they are different.
· Returns on investments or ROI
The returns you get from ULIPs are generally on the lower side as it offers a fixed sum irrespective of whether the investment plan earns a profit. In contrast, the returns from investments in mutual funds would vary based on the scheme’s performance you invest in. Typically, equity mutual funds offer high returns but have high-risk potential. In contrast, debt mutual funds are relatively safer and offer slightly lower returns.
· Lock-in period
ULIP is primarily an insurance product. Therefore, insurance companies have a specific lock-in period for the investments before you can redeem them. The lock-in period can range between three to five years, depending on the structure and nature of the investment scheme.
On the other hand, mutual funds have a lower lock-in period of one year. In some cases, like ELSS (equity-linked savings scheme), the lock-in period is three years.
· Tax benefits
The premium you pay for ULIPs is eligible for tax benefit under Section 80C of the Indian Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 lakh in a financial year. In contrast, you do not get any tax benefits on investments in mutual funds except in ELSS. Also, the amount you get from mutual funds redemption is taxable as per your usual tax bracket.
· Risk cover
ULIPs have a built-in insurance cover that offers the sum assured to the family members if the policyholder passes away during the policy period. However, with mutual funds, you don’t get any insurance cover. You must buy a separate insurance policy and pay an additional premium.
Final Word
Thus, mutual funds and ULIPs serve specific purposes and have their unique pros and cons. The decision on which investment you must choose depends on your preference, needs and financial objectives. Do your diligence and make an informed decision.