In today’s day and age, when everything is uncertain because of the Coronavirus (COVID-19) pandemic, it is essential to invest money in the right financial products to earn a good return. Investors have many options to choose from; however, usually, it narrows down to investing either in Unit-Linked Insurance Plan (ULIP) or mutual funds.
Before investing money in either of the two instruments, you should understand these products properly. First, let us tell you what is ULIP plan. ULIP is a type of life insurance policy that provides investment options and can help you earn good returns over time.
Conversely, a mutual fund is a goal-based investment. You can choose a fixed monthly amount, depending on your goal, whether short term or long term, and the money is invested in various assets to give you high returns. You should invest in mutual funds when you have an insurance policy so that you and your family members are safeguarded. Here, we will compare these two investment avenues based on various aspects, like:
- Fund allocation
When you invest in ULIP, the insurer utilizes a part of your premium in equity, debt, or a combination of both types of funds as per your choice. On the other hand, as a mutual fund is purely an investment instrument, your entire money is invested in purchasing units. In mutual funds, a fund manager pools money from investors and selects an ideal fund based on his or her knowledge.
- Tax exemptions
One of the prime reasons to invest in financial products is to save tax. ULIP tax benefits are much better than the deductions offered by mutual funds. The premium that you pay towards your ULIP is tax-exempt up to INR 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. Besides this, the death and maturity benefits are tax-free according to Section 10(10D) of the Act. In the case of mutual funds, only Equity-Linked Savings Scheme (ELSS) offers tax deductions as per Section 80C. However, even ELSS returns are subject to taxation if they exceed INR 1 lakh in a financial year. Also, in mutual fund investments, the maturity amount is not tax-free.
- Lock-in period
ULIPs come with a mandatory lock-in tenure of five years, which allows you to inculcate a savings habit. ULIPs enable the investors to reap the benefits offered by the power of compounding. Mutual funds do not have any specific lock-in duration. However, it is advisable to exit the investment after a year to avoid any charges. You can withdraw your money invested in mutual funds when required, whereas, in ULIP, you can partially withdraw your funds after the compulsory lock-in term.
- Risk
As stated earlier, ULIP is an insurance policy; it will cover the family against the financial risk that can arise due to the untimely absence of the policyholder. In the case of the policyholder’s death, the family will receive the sum assured; so, they will not face any monetary obstacles. Mutual funds do not provide any life cover, as they are a financial product specially designed to achieve short and long-term financial goals. The risk involved in mutual funds varies from high to low, depending on the type of fund that you choose for investment.
To sum it up
Depending on your financial goals and the amount you want to invest every month, make a smart choice between ULIPs and mutual funds. If you already have an insurance policy, you can consider investing in mutual funds. However, if you do not have an insurance plan, then investing in a ULIP is a wise idea. Also, ULIP returns are better when compared to mutual funds in the long run. Additionally, ULIPs provide more flexibility when it comes to making the correct switches among funds at the right time, depending on the market’s situation. If you stay invested for approximately 15 years, you can earn lucrative ULIP returns. So, consider all these factors and then make a wise investment decision.