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. There are life goals that 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 in doing that, 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 policy. In the investment part, you get to invest in equity funds, debt funds or balanced funds. This investment is done on the basis of your risk appetite and your 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 term of the policy, your insurer will give them a death benefit.
What is 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 that are gained from this investment is paid back to the investors once the term of the fund expires. There is no insurance cover 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 that you pay towards the policy is tax-deductible under the Section 80C of the Income Tax Act. The limit for this is up to Rs.1.5 lakhs of premium payment. In ULIPS, you have the option of making partial withdrawals once the lock-in period gets over. These withdrawals are also tax-deductible under Section 10(10D) of the Income Tax Act under certain conditions. Similarly, the maturity benefits from the policy are also tax-deductible under the same section.
On the other hand, only the premiums paid are eligible for tax-deductions. However, the pay-out that you receive from the fund get taxed. The tax limit ranges from 10-15% depending on the type of mutual fund that you invest in.
As you are aware, you have the option of investing in equity funds, debt funds or balanced funds in ULIPs. Equity funds are high-risk, with higher returns; debt funds are low-to-medium risk, medium returns fund. Balanced fund is a mixture of both. If you invest a majority of your capital in equity and want to reallocate a part of it to debt fund, you can do so with the help of switching.
In mutual funds, there is no option of 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 cover to your loved ones from different life risks. If you were to pass away suddenly during the term of the policy, the insurer will provide financial assistance to your family in the form a death benefit.
This option is not present in mutual fund 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, it is clear that ULIPs have more benefits that mutual funds. Before you invest in ULIPs, make sure to use the ULIP return calculator to see what your returns could be based on your investment.