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.
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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.
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.
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.