Wealth creation is a concept that has become quite important for today’s generation. They do not want to rely simply on savings and deposits to enjoy a financially secure future. Life goals need to be accomplished at different stages of life. To do so, a huge sum of money is required. While your income might not help, you can always invest your money in different financial instruments to gain good returns.
Among the popular instruments are ULIP and mutual funds. However, each of them provides a different benefit to the buyer. What are the differences between the two? Which one should you invest in? Read more to find out.
A ULIP policy is a type of life insurance policy that provides the policyholder with dual benefits of investment and insurance under the same procedure. In the investment part, you get to invest in equity, debt, or balanced funds. This investment is made based on your risk appetite and requirements. Each fund has a different risk factor and variating returns.
In the insurance part, life cover is provided to your family to protect them from life risks in your absence. If you were to pass away suddenly during the policy term, your insurer would give them a death benefit.
What is a mutual fund?
A mutual fund is a type of fund that is managed by an asset management company. They pool money from investors and invest it in equity stocks on the market. The returns from this investment are paid back to the investors once the fund’s term expires. There is no insurance coverage in this fund.
What are the differences?
If you are confused between ULIP and mutual fund, listed below are the major differences between the two:
1. Tax benefits
In ULIPs, the premiums you pay towards the policy areare tax-deductible under Section 80C of the Income Tax Act. The limit for this is up to Rs.1.5 lakhs of premium payment. In ULIPS, you can make partial withdrawals once the lock-in period is over. These withdrawals are also tax-deductible under Section 10(10D) of the Income Tax Act under certain conditions. Similarly, the policy’s maturity benefits are tax-deductible under the same section.
On the other hand, only the premiums paid are eligible for tax deductions. However, the payout that you receive from the fund gets taxed. The tax limit ranges from 10-15%, depending on the type of mutual fund you invest in.
As you know, you can invest in equity, debt, or balanced funds in ULIPs. Equity funds are high-risk, with higher returns; debt funds are low-to-medium risk, medium returns funds. A balanced fund is a mixture of both. If you invest most of your capital in equity and want to reallocate a part of it to a debt fund, you can do so with the help of switching.
In mutual funds, there is no option for switching. As the money is invested only in equity funds, there is no second type of fund available that you can choose to invest in. Also, in ULIPs, you can track your investment and its returns. This is not possible in mutual funds, though.
3. Life cover
In ULIPs, the second benefit you get as a policyholder is the life insurance cover. A part of the premium is used towards providing shelter to your loved ones from different life risks. If you were to pass away suddenly during the policy term, the insurer would provide financial assistance to your family as a death benefit.
This option is not present in mutual funds as it is used purely for investment and has no other purpose.
These are just a handful of differences between ULIPs and mutual funds. However, ULIPs have more benefits than mutual funds. Before investing in ULIPs, use the ULIP return calculator to see what your returns could be based on your investment.