Mutual fund vs ULIPs are extremely popular investment options amongst individuals. In this blog we explain the major differences between the two in order to enable investors to make the right investment decision in relation to their portfolio.
What Are Mutual Funds ?
Mutual funds are a type of investment product. Each mutual fund, also known as a mutual fund scheme, is a fund that is professionally managed by professionals. For their investment needs, investors subscribe to mutual fund (MF) schemes. The combined funds are invested in equities (stocks) by teams of research analysts and professional fund managers. Mutual funds, like any other investment product for ex. bank fixed deposits (FDs), generate a rate of return. The rate of return for the MF scheme is susceptible to market risks, unlike bank FDs. MF schemes can provide ordinary investors with wealth-building options due to their broad market risk exposures.
Mutual funds have a long history. The first mutual fund was established in Boston, USA, in 1924. The mutual fund investment sector in India has been around for more than fifty years. Mutual funds have evolved into a significant platform for saving and wealth creation throughout time. Systematic investment plans, or SIPs, are currently a popular method of building wealth. The two types of investors in Indian mutual funds are small businesses and households.
Investors occasionally refer to mutual funds as mutual fund (MF) schemes, as was previously mentioned. The products offered by asset management firms (AMCs) are MF schemes. AMCs provide a variety of investment productsto meet the demands of investors. Retail investors are able to participate in the economic expansion of the country thanks to mutual funds. Mutual fund investing operations are governed by SEBI (Securities and Exchange Board of India), India’s capital markets regulator. Be aware that each mutual fund scheme has a declared goal or objective and risk recommendations. Investors are, understandably, focused on returns. However, it’s crucial to comprehend a scheme’s risk-return profile, purpose, and whether they are in line with investor needs.
What Are ULIPS ?
Unit Linked Insurance Plan is the full name for ULIP. A ULIP is a type of life insurance that offers the advantages of both an investment product to help you reach your long-term financial objectives and a life insurance policy to protect your family’s finances in the event of your passing. There are two portions to the premium you pay for a ULIP plan. Your life insurance premium is paid for in part, and the remaining sum is placed in market-linked securities of your choosing. Depending on your aims in life and level of risk tolerance, you can invest in equities, debt, or a combination of the two. Let’s take a closer look at what a ULIP plan is and how it operates.
Meaning of ULIP’s Plan
A life insurance policy that combines the security of life insurance with the possibility of investment returns is known as a unit-linked insurance plan, or ULIP. You are given units based on the percentage of the fund that you invested in. The net asset value (NAV) of these units is determined on a regular basis. These units’ NAV changes in accordance with the market because they are connected to it. You can diversify your ULIP investments to lower your risk, which will eventually result in an increase in the average NAV.
How Do ULIPs Operate?
You must continue paying a little sum known as premiums, just like with every other type of life insurance, to keep your policy active. Up to 100% of your premium can be allocated to investments in ULIPs. The premium you pay is divided among various funds in accordance with the ratio you specify. Units are assigned in accordance with your contribution after your premium has been divided among your selected funds. Units are computed using NAV (Net Asset Value).
The insurance company deducts various fees from your fund after units are allotted. The many charge kinds include:
- Charges for mortality
- Fees for managing policies
- Fees for fund management
- Fees for fund switches
Some fees are deducted on a monthly basis, while others are deducted on a quarterly basis. The next thought that might cross your mind after learning about these fees is how your fund is managed. Your fund in ULIPs is managed by talented and highly qualified investment managers.
Advantages of Buying ULIPs
The finest ULIPs provide average investors with a number of benefits. Young investors are becoming more and more aware of these advantages, and ULIPs are swiftly rising to the top of the list of favoured investment options. Here’s why more people are opting to get the greatest ULIP that financial institutions have to offer:
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The Benefits of Insurance and Investment Together
The only investment choices that combine the advantages of investing with insurance are ULIPs. You get a secure life protection through the plan’s insurance component. You obtain maturity benefits if you live over the plan’s term. On the other hand, if you do not live to see the plan through, your beneficiaries will get death benefits that will assist them in navigating any financial difficulties that may arise after your passing. The finest ULIPs also enable your investment to increase over time, creating a sizable corpus that you can draw from later in life.
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Investment Flexibility
The freedom they provide is another factor in why people decide to invest in the top ULIP. Most other investing alternatives invest your money in the same vehicle over the course of the investment period. However, based on your risk tolerance, you can choose between debt, equity, or balanced funds in ULIPs. Right at the beginning of the investment tenure, you can select the type of units you wish to buy. Then, if needed, you can transfer your money to other low-risk or high-risk funds based on market developments and variations in your risk exposure.
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Tax Advantages
The greatest ULIPs also provide investors with tax advantages. Since ULIPs are fundamentally investment products, section 80C of the Income Tax Act allows you to deduct the premium you pay to invest in these plans. The premium you pay each fiscal year can be deducted from your yearly income total, lowering your tax obligation. In addition, under section 10 (10D) of the Income Tax Act, the maturity or death benefits received from the ULIP programme are also tax-free. With so many tax advantages to its name, it makes sense that intelligent investors are favouring ULIPs more and more.
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Investment Strategy
Because ULIPs are so versatile, you have complete discretion to select how you want to invest your money. Depending on your preferences and level of risk tolerance, you can invest in either equities funds or debt funds, or even a combination of both. In ULIPs, you can switch between two funds at any time by using the fund switching option.
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Fulfill Your Life Goals
Your family and you put a lot of effort into achieving your goals in life. The right investments must be made in order to accomplish a life objective. You have the option to invest in the market using ULIPs. This gives you the opportunity to accumulate substantial cash that you can use for your retirement, your child’s higher education, or perhaps their wedding. It also includes your life so that even without you, your family can accomplish their objectives.
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High Liquidity
You are offered very little liquidity in the majority of investing alternatives because the money is only made available at maturity. On the other hand, ULIPs feature a partial withdrawal option. You can begin taking withdrawals from your retirement corpus after the 5-year lock-in period. When you require rapid cash, this becomes incredibly useful.
Who Must Purchase a ULIP?
One of the best investing alternatives on the market is the ULIP. Though anyone over the age of 18 who wants to invest in a ULIP is free to do so, if you fall into one of the following categories, you should give it some thought.
- ULIPs often have a long-term perspective if you’re seeking for a long-term investment. You cannot withdraw your money during the five-year lock-in term. This preserves your money and gives it time to flourish. So, if you have long-term objectives to pursue, ULIP may be an option.
- ULIPs give you complete flexibility and transparency in your investments if you desire to manage your assets. You are aware of the location and amount of your investments.
You can adjust your money’s distribution among several funds in accordance with the market and its level of risk. A fixed ratio of the funds to be invested is another option. As an illustration, say that 50% of your money is invested in equities funds and the rest in debt funds.
Invest According To Your Shifting Risk Tolerance
It’s unlikely that your risk tolerance will remain constant over the course of your policy. You want to take risks sometimes, and you want to play it safe other times. ULIPs give you the freedom to adjust your money allocation based on your risk tolerance. You have a variety of options for funds, each with a distinct level of risk. You can choose equities funds if you want to take chances. On the other hand, debt funds provide low-risk and protect your money.
- A Good Investment: ULIPs
ULIPs present itself as a highly dependable investment choice that can assist you in building enormous riches. Additionally, it provides protection for your family through its life insurance component. Here are some reasons why it makes an excellent investment.
- Long-Term Investment
ULIPs are ideal for you if you have a long-term investing horizon, as was previously mentioned. The ULIP have typically a 5-year lock-in period. During this time, withdrawals are not permitted. This promotes financial growth and aids in the development of sound saving practises.
- Life Insurance
Long-term ULIP investments are possible, but what will happen to your family if you pass away suddenly? This is handled by ULIP because it also protects your life. Your family will get the sum assured as a death benefit if you pass away while the policy is in effect. This will enable them to move forward in their life and accomplish their objectives.
- Adaptability
You have complete flexibility and transparency with ULIP. In accordance with this plan, you can pick the investments you want to make and change the allocation ratio for the funds. Additionally, it gives you options for how to pay for premium services.You are fully aware of an investment’s value and the funds in which it is placed.
- Tax Advantages
ULIPs assist in tax reduction as well. Under section 80C of the Income Tax Act of 1961, you may deduct up to Rs 1.5 lakh from the amount you pay as your ULIP premium. According to Section 10(10)D, both the maturity benefit that you will receive and the death benefit that your family will receive may be tax-free.
How Can You Pick the Best ULIP?
A Unit Link Investment Plan is provided by numerous insurance companies because it is a well-liked investment. Each has a unique set of qualities and advantages. Consequently, picking a ULIP can be difficult. So that you may purchase a plan that best suits you, you should take into account the following factors.
Reasons To Purchase A ULIP
Consider your reasons for investing in ULIPs. You can have specific objectives in mind for the investment. Your desired outcome should be crystal obvious to you.
You might need to take more chances and experience rapid growth in order to reach the objective of ensuring that youngsters receive a higher education. On the other hand, you must take extra precautions if you want to build a retirement fund. ULIP enables you to invest in a variety of funds based on your preferences and risk tolerance.
- Select The Best Coverage
ULIPs contain a life insurance component in addition to financial options. If you pass away while the policy is in effect, your family will be given a death benefit. To select the proper life insurance, consider your family’s needs and projected expenses. This would ensure your family’s financial security while you are away.
- Benefit Of Premium Funding
This feature is present in the top ULIPs. This feature makes sure that your insurance continues to function as intended after your death. If your insurance policy includes this provision, it will cover all outstanding premiums after your passing. Policy is maintained until it reaches maturity. This function is especially useful when making plans for objectives like a child’s schooling.
- Policy Fees
ULIPs are connected to a variety of fees. These can take the shape of fund administration fees, premium allocation fees, etc. Before purchasing your plan, learn more about these costs. The policy with the fewest charges should be your choice. No premium allocation or policy administration fees apply to plans like Invest 4G from Canara HSBC Life Insurance Company.
- Acceptable Fund Switches
You can switch between the funds you have invested in during the policy using this service. The number of switches you can perform for free typically has a cap.
Mutual Fund vs ulips: Which Is better?
For people who desire both an insurance policy and the chance to develop their assets, ULIP is a better investment solution. Mutual funds don’t provide you with these assurances, but they do provide you more freedom over how much of your money is invested in certain industries. The lock-in term for ULIP is typically five years. Except for ELSS mutual funds can be withdrawn at any time. You can switch between funds using ULIPs without paying any taxes, which is a plus. You can change between a fund house’s schemes using mutual funds. The switching will be taxed and subject to capital gains tax because it is seen as a redemption.
Mortality fees, premium allocation fees, fund management fees, and administration costs are some of the ULIP elements that might be charged for. However, mutual funds are not subject to the entrance load. However, annual fund management fees can be required. Depending on the product, mutual funds could potentially impose an exit load.
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