ULIP vs Mutual Funds: Which is Better?| North Loop Official Blog
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08 Apr 2020

ULIP vs Mutual Funds: Which is Better?

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ULIP vs Mutual Fund

You may be wondering if you should invest in a ULIP or a mutual fund. To determine this decision, you will need to know the difference between a ULIP and a mutual fund. From there, we will show you how to decide ULIP vs mutual fund - and which is the best option for you.

What is a mutual fund?

A mutual fund is a fund that is run by professional managers (read more about it here). They will invest your money in specific themes (debt, equity, sectors etc) and have a wide variety of options for investors.

You can invest in a mutual fund with either a specific amount (lump sum) or through regularly scheduled investments known as SIPs. Mutual funds are the most popular way for Indian investors to save for retirement or specific goal-related plans e.g. buy a house.
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What is ULIP investment?

Unit-Linked Insurance Plans (ULIP) are in essence, a mutual fund plan plus life insurance. You will invest, as well as make regular insurance premium payments. In a ULIP, you will make regular payments to an insurance company. The company will set aside a certain amount for your life insurance, and invest the rest in securities (just as a mutual fund would do).

ULIPs on their surface may make sense to you - after all, you are looking to invest in mutual funds, as well as get life insurance - so why not combine both? North Loop, after all, recommends investing as well as getting insurance to protect your financial health.

ULIP vs Mutual Fund: What's the Difference?

There are certain things to be careful of.

Separation is Important
Life insurance and investing are two very different financial instruments, and serve very different goals for you. Insurance is no risk cover for you - combining can have unintended consequences.

Focus and Returns on Investment
An insurance company’s focus is insurance and risk-pricing. Insurance companies excel in pricing your premiums, and making money on that. Mutual funds have a focus on generating returns by investing in securities, and their success is dependent on that. Thus, it is better to go to specialists for either goal rather than combining and not getting the very best mutual fund investing options possible. Think of it as restaurants - an Indian restaurant makes the best Indian food. An Italian restaurant makes the best Italian food. Combined, they won’t be as good due to a lack of focus.

Tax-Savings (ULIP vs ELSS)
ELSS Funds and ULIPs are both tax-saving options, providing the same deduction (up to Rs. 15 lakhs under Section 80C of the Income Tax Act). However, ELSS have higher annual returns and lower, more transparent fees.

Liquidity
Most ULIPs have a lock-in period of 5 years. Mutual funds, on the other hand, don’t have lock ins - you can sell your investment in them whenever you want. If you need cash, you can quickly exit your mutual fund investment - this option isn’t available if your money is tied up in a ULIP.

Insurance Cover
Since ULIPs include life insurance, if the policyholder dies, the family members will be compensated as per the life insurance policy. Mutual funds, on the other hand, will transfer the investment to a nominee - there is no insurance cover in mutual funds.

Fees and Expense Ratios - Transparency
Mutual funds are extremely transparent about their fees - you know exactly how much you will be charged annually (expense ratio) or if the fund has an exit fee. Mutual funds aren’t expensive - you will not find an expense ratio of more than 2.5%.

Because ULIPs combine insurance, it is difficult to understand their fee schedule, what exit fees are there and how much you’re actually paying due to the combination of insurance and investment products in one package.

Conclusion - Which is Better - ULIP Vs Mutual Fund

This is not possible to say! It depends on your goals and requirements (speak to an advisor at North Loop to understand more). We generally recommend separating life insurance and mutual funds investments as they serve two very specific purposes in your financial goals. Generally speaking, mutual funds are more transparent for fees, and provide better returns on investment.

Here are some questions you can ask yourself when deciding which plan is better for you?
  • What are my financial goals?
  • How much do I need to invest?
  • What is my risk threshold?
  • Do I already have life insurance?
  • What is my investment horizon?

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.