Finding it hard to choose between ULIPs and mutual funds? These are top-rated investment options in India, and investors often struggle to choose between them. While they share some similarities, there are crucial differences that you must analyse before making a decision.
This blog takes you through the definitions, pros and cons of mutual funds and ULIPs, and enables you to make a rational decision based on your circumstances.
Let's start by defining ULIPs.
ULIPs, or Unit Linked Insurance Plans, are a type of insurance that combines investing and insurance into one package. They offer the potential for wealth creation and the security of a life cover.
As we have established the definition of ULIP, let's see how ULIP works.
Now we know what are ULIPs, let's look into the definition of mutual funds.
Mutual funds are a type of investment where an asset management company (AMC) manages funds from several investors. These are invested across financial instruments like stocks, bonds, or other assets. You should consider mutual funds if you want a balanced portfolio that invests in both high and low-risk funds.
As we have looked at what are mutual funds, here's how mutual funds work.
You can invest in mutual funds through the Systematic Investment Plan (SIP), where you can invest in regular intervals. Or, you can choose the lump sum method, wherein you put all your funds at one go.
Investing in a mutual fund is equivalent to buying shares of the fund, which is a part of the overall portfolio. Depending on the performance of the underlying assets in the portfolio, the value of your shares in the mutual fund will go up or down. You can choose to buy and sell mutual fund shares at any time.
While deciding which is a better investment, ULIP or mutual fund, it is prudent to evaluate the risks and benefits of each investment option.
So, let's start by exploring the pros and cons of ULIP.
Here are some of the reasons to invest in ULIP.
As ULIPs allow for long-term financial investment, they are ideal for accumulating wealth, making them useful for long-term financial goals, such as retirement planning.
Under the Income Tax Act of 1961, ULIPs offer tax benefits on premium payments and tax-free and tax-advantaged returns to policyholders. Moreover, the death payments are also tax-free. You can also make tax-free debt-equity switches.
ULIP also enables you to make partial withdrawals once the 5-year lock-in period is over, as long as these withdrawals don't exceed 20% of the fund's value. This can be immensely useful in emergencies as it ensures you are financially prepared.
ULIPs create a considerable amount of wealth over the long term. The return on investment generated can be higher than traditional investment options.
ULIPs provide a high degree of flexibility. Investors can choose from various options, depending on risk appetite and investment goals. You can also change your life cover or your premium investment amount.
ULIPs are one of the best ways to achieve significant financial goals and investment objectives, like purchasing property or ensuring a comfortable retirement. They encourage disciplined investment, eliminating the risk of short-term goals gaining precedence over long-term ones.
While ULIP plans have several benefits, there are some downsides as well. Here are some of the disadvantages of ULIPs.
ULIPs typically have high charges associated with them, including premium allocation charges, policy administration charges, fund management changes, and mortality charges.
Due to the volatility and unpredictability of the market, your investment might not perform as well as expected, especially in the initial period when you're still learning how to navigate the market.
Initially, you will most likely be able to switch your funds for free. However, after a certain point, which varies depending on the insurer, you will be charged for switching funds. Moreover, if you surrender your ULIP before the end of the policy term, you will face high surrender charges.
Another disadvantage of ULIPs is their complexity, mainly as they serve as both a life insurance policy and an investment. This complex structure prevents investors from fully understanding the product and the associated risks.
The 5-year lock-in period may be inconvenient in an emergency, as you cannot withdraw money from ULIPs during this period, even if you cancel your ULIP.
Now, let's look into the pros and cons of mutual funds in detail.
Here are some advantages of mutual funds that have made them highly popular.
When purchasing a mutual fund, you will have to pay a management fee, which is used to hire a professional portfolio manager. So, investors who don't have the time or skills to do the research and asset allocation can opt for mutual funds, as they come with efficient portfolio management.
You have the option of using the proceeds generated from the mutual funds to buy more shares. This is known as dividend reinvestment. This contributes towards the growth of your income.
Mutual funds allow investors to diversify their investment portfolio across various securities, reducing overall investment risk.
Mutual funds are easy to buy and understand, which makes them highly convenient for beginners. They usually have low minimum investments and are traded only once every day at the closing net asset value, eliminating price fluctuation throughout the day.
Before deciding what is a better investment, it is crucial to consider the disadvantages of mutual funds.
Costs associated with mutual funds tend to become excessive. You will have to pay for the market analysts and the fund manager. Moreover, you might be charged entry or exit load or both.
Although expert fund managers usually manage mutual funds, there is potential for management abuse, which may take the form of insider trading, self-dealing, and misrepresenting fund performance.
As both short-term and long-term capital gains from mutual funds are subject to taxation, it can impact overall returns.
Mutual funds are subject to short investment horizons, day trading, or market timing. As a result, the execution times are slower.
Now that you have a clear idea of these investment options, let us explore the difference between ULIP and mutual fund in greater detail by comparing and contrasting them on various parameters.
| ULIP | Mutual Funds | |
|---|---|---|
| Investment Objective | Insurance, with investment as an added advantage | Purely oriented towards wealth creation |
| Financial Goal | Long-term investment to reach life objectives while also protecting the family | To reach short-term goals |
| Regulatory Board | The Insurance Regulatory and Development Authority of India (IRDAI) | The Securities Exchange Board of India (SEBI) |
| Return on Investment | Although it depends on market performance, returns are usually high. | Equity mutual funds can provide high returns, while debt mutual funds offer moderate to low returns |
| Plan Flexibility | You can choose the size of the portions for insurance and investment and switch between equity and debt funds | Switching between the funds is not possible |
| Lock-In Period | A minimum of five years | No lock-in period for regular mutual funds. However, ELSS (Equity-Linked Savings Scheme) funds have a lock-in period of 3 years. |
| Transparency | IRDAI provides a high level of transparency as all information on fund allocation | A detailed report of the mutual fund investments will be provided to you by the fund houses. |
| Tax Benefits | Premiums are exempted from taxes up to Rs 1.5 Lakh. Returns are tax-free. | OnlyELSS (Equity-Linked Savings Scheme) funds qualify for tax exemption up to Rs 1.5 Lakh |
| Fund Management Charges | 1.35% (Average) | 2.50% (Average) |
| Risk Cover |
In case of the policyholder's demise, the nominees are compensated for the sum insured | The investments are transferred to the nominee in the event of the policyholder's demise |
As the financial requirements and goals, investment duration, and risk profile vary from investor to investor, there is no best investment option for everyone. After thoroughly analysing ULIP vs mutual fund, and their advantages and drawbacks, make a well-informed decision based on your needs.
With two decades of experience helping investors reach their objectives, PNB MetLife understands your needs and provides for them efficiently. We offer a wide range of investment options, including several long-term saving plans, from which you can find the best fit. With us, you can secure your wealth, and create more, conveniently.
Both these investment options have advantages and disadvantages, which you must factor in before deciding. Make sure to analyse your financial situation, objectives and risk appetite carefully.
Here are some of the factors to consider before choosing an investment option:
When you have a steady income and not too many commitments, it might be a good idea to invest in ULIPs.
PNB MetLife offers a variety of insurance plans to fit the requirements of different types of investors. These plans include:
Risk cover is long-term insurance that provides financial protection against unfortunate events like disability, critical illness, or death. Here, a regular premium payment is made to the insurance company. In case the insured event occurs, the insurance company pays a certain amount of money to the policyholder or the beneficiaries.
Even though both offer the potential for higher returns over the long term, ULIPS may be more suitable, as they encourage goal-based savings.
Yes, mutual funds and ULIPs allow you to take a loan against your investment, subject to certain terms and conditions.
Yes, you can withdraw your money. However, there are restrictions on the minimum holding period or exit loads.
Investing a small percentage of your income, such as 10-15%, is generally prudent. However, this may vary according to circumstances and goals.
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
PNB MetLife India Insurance Company Limited
Registered office address: Unit No. 701, 702 & 703, 7th Floor, West Wing, Raheja Towers, 26/27 M G Road, Bangalore -560001, Karnataka
IRDAI Registration number 117 | CIN U66010KA2001PLC028883
For more details on risk factors, please read the sales brochure and the terms and conditions of the policy, carefully before concluding the sale.
Tax benefits are as per the Income Tax Act, 1961, & are subject to amendments made thereto from time to time. Please consult your tax consultant for more details.
Goods and Services Tax (GST) shall be levied as per prevailing tax laws which are subject to change from time to time.
The marks "PNB" and "MetLife" are registered trademarks of Punjab National Bank and Metropolitan Life Insurance Company, respectively. PNB MetLife India Insurance Company Limited is a licensed user of these marks.
Call us Toll-free at 1-800-425-6969, Phone: 080-66006969, Website: www.pnbmetlife.com, Email: indiaservice@pnbmetlife.co.in or Write to us: 1st Floor, Techniplex -1, Techniplex Complex, Off Veer Savarkar Flyover, Goregaon (West), Mumbai – 400062, Maharashtra. Phone: +91-22-41790000, Fax: +91-22-41790203.
| Beware of Spurious Phone Calls and Fictitious / Fraudulent Offers! IRDAI or its officials is not involved in activities like selling insurance policies, announcing bonus or investments of premium. Public receiving such phone calls are requested to lodge a police complaint. |
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