ULIP VS MUTUAL FUNDS

Definitions

• Mutual fund is a collection of funds obtained from multiple investors and are used for investments in securities. Mutual funds can involve investment in different types of securities, and the choice of securities is made according to the pre-decided goals of the investors.
• ULIP is a kind of insurance product that involves investment as well. A portion of the insurance premium is used for investments on behalf of the These investments can be made into hybrid funds, money market funds, debt funds, equity funds, etc.

• Investors who opt for mutual funds are usually the people with medium or short-term investment goals. Many types of mutual funds are available in the market, and all of them have a specific kind of financial goals that they can serve.

ULIPs are more suitable for the investors that have long-term investment goals as they have long durations of maturity. They provide dual benefits of insurance and investments and are hence, a smarter choice in the long run.

• There is no option of switching funds when it comes to mutual funds. The only option that the investors are provided with is the option of giving up the fund completely. There can be exit charges involved, if you wish to exit mutual funds.
• ULIPs provide the option of fund switching for their investors as per their subscribed plans. This option is useful regarding the switching of return rates on their investments and hence increasing the overall return.

• It is easy to sell funds if you have purchased mutual funds. They can receive the return in a short amount of time if they sell out the funds earlier. The process of selling can be carried out within two business days. The ELSS funds are an exception to this as they have the condition of a minimum lock-in period.
• It is required to carry on investment for a certain period in case you have opted for ULIPs, unlike mutual funds. Hence there is only limited liquidity in ULIPs.

• Mutual funds have charges like entry load as well as exit load. Also, the charges like annual fund management are associated with mutual funds.
• ULIPs on the other hand, have charges like mortality fee involved which is charged against the life insurance coverage that is provided alongside the investment. Other charges involved are charges for fund management, administration fee and charges for premium allocation.

• There is more convenience to mutual funds investors compared to ULIP investors when it comes to flexibility. It is easy to invest in mutual funds, and they can be of short-term duration – as low as one year. Another flexibility benefit is that they have a low minimum balance. It is very easy to consolidate funding with the help of SIP (Systematic Investment Plan). The withdrawal from SIP is also a very simple procedure.
• The structure of ULIPs is more structured than that of mutual funds as it is devised by a specialized insurance advisor. The plan is made keeping in mind the financial goals as well as the earnings of the investor. A fixed premium is to be paid by the investor in ULIP for a minimum duration of 5 years. In case an investor wishes to exit the ULIP plans before the minimum duration of the plan is over then, he will have to bear the loss of capital or a part of the premium amount.

• The mutual funds disclose their portfolio to its investors quarterly and in some cases monthly as per the rules of SEBI (Securities and Exchange Board of India). The major reason behind this disclosure is to assure the investors that their funds are yielding them proper returns. Also, the investors get aware of the portfolio of mutual funds.
• The ULIPs also disclose the portfolio on the monthly or quarterly basis. It is considered evidence regarding the transparency of investments

• When it comes to mitigation among various plans mutual funds, do not offer as much flexibility as compared to ULIPs. These funds are highly useful if an investor is experienced and he knows where to invest. For instance, an experienced investor will move from debt funds to equity funds when the stock market is at its slow performance and then switch back from equity funds to debt funds when the market performance is high. But in case an investor decides to move to another mutual fund by taking an exit from the current fund, he or she will have to bear the exit fee of the fund.
• The asset allocation flexibility is comparatively higher in ULIPs as the investors have the freedom to switch a limited no of times in a year. The investors have to pay a certain amount of fee if they exceed the number of switches on an annual basis. The fee is charged for every change made above the fixed no of switches.

• The mutual funds that fall under the category of tax-saving funds are only considered for tax benefits. These benefits and funds are listed under Section 80C.
• Under Section 80C of the I-T Act, the premium paid for the insurance is tax free. The death benefits are also tax free. However, one point to be noted is that the annual premium should be less than 10% of the sum assured under the ULIP.

When we look at the recent situation of the Indian investments market, especially after the budget 2018, ULIP has proven to be a better investment choice. The major reason behind these projections was the 10% tax (Long-Term Capital Gain Taxes) imposed on equity-based mutual funds. Below given are some of the major considerations in this matter:

• Mutual funds are subjective when it comes to the risks in the financial market. There is no guarantee of its creditworthiness and performance in the market. They pose a higher risk when it comes to investments compared to ULIPs.
• The life insurance coverage under ULIP plans is too big of a benefit to miss out on. There is also a triple tax benefit attached to ULIPs, and the charges are mainly mortality charges which are bearable compared to the risk in mutual funds.
• You can go with mutual funds in case you want to enjoy a shorter lock-in period as well as the flexibility of fund mitigation. But the tax rebates are only provided to the investors under ELSS.
• Not all ULIP plans provide a constant life cover, ULIP cover (if it is not type II ULIP), is fund value or Rs 5 lakh (whichever is high). In case you go for a term cover, there will be a constant cover for almost 20 years. The investments made inULIP are This way, regulated savings can be ensured by investors.

The final decision about which product to invest in can be taken only by the investor, but the above arguments can largely help making the decision. Investors looking for higher flexibility can go for mutual funds, whereas, investors targeting long-term benefits can go for ULIP plans. It is important to look from all sides, financial goals, tax benefits, income as well as return on investment before making the appropriate decision.