ULIP vs MF
If you think about a professionally managed, diversified portfolio with market-linked returns, two names come to mind – Unit linked insurance plans (ULIPs) and mutual funds (MFs). Both these avenues are market-linked and give you the benefit of attractive returns through a diversified portfolio. But, they are different from one another and also have their respective pros and cons. So, let’s understand both
What are ULIPs?
Unit Linked Insurance Plans are investment-oriented life insurance plans that invest your premiums in market-linked funds. The funds accumulate the investment of different investors and then allocate the pooled corpus into different securities depending on the fund objective. The funds are managed professionally. There is a mortality cost attached to ULIPs as it provides insurance coverage throughout the policy tenure. Along with insurance, you also get to create wealth through market-linked returns.
What are Mutual funds?
Mutual funds are pooled investment avenues where investments of different investors are pooled in a corpus. The corpus is, then, invested in various types of securities, by an experienced fund manager, depending on the investment objective of the scheme. If the value of the portfolio rises, investors earn returns from their mutual fund investments.
Difference between ULIPs and MFs
| Points of Difference | ULIPs | MFs |
|---|---|---|
| Insurance coverage | Available | Not available, under most schemes. However, some schemes offer insurance cover as an added benefit. |
|
Expense ratio |
High | Low |
|
Tax benefits |
Investments and maturity proceeds are tax-free subject to specific conditions. Partial withdrawals and switches are also tax-free | Returns earned and redemption proceeds attract tax. Investment into ELSS schemes has a tax benefit under Section 80C. |
| Liquidity | Illiquid during the first 5 policy years | ELSS schemes are illiquid during the first 3 years. However, other schemes are completely liquid. |
| Types | Can be offered as basic ULIPs, child ULIPs or retirement-oriented ULIPs | Come in different schemes and each scheme has a different risk-return profile. |
How ULIPs score over MFs?
Besides the life insurance coverage, ULIPs have a distinct tax advantage over mutual funds. Investment into all types of ULIPs qualifies as a deduction under Section 80C or 80CCC up to Rs.1.5 lakhs. However, in the case of MFs, only ELSS schemes give you this benefit. Secondly, the maturity proceeds are completely tax-free if the premium was limited to 10% of the sum assured. For MFs, your returns might be taxable depending on the scheme you choose and the investment tenure. Lastly, ULIPs allow tax-free switching and partial withdrawals which is not available under MFs. So, from a tax perspective, ULIPs are better.
How MFs score over ULIPs?
A low expense ratio, high scheme variety and liquidity make MFs better than ULIPs. Also, if you choose to invest in ELSS, you can claim tax benefits under Section 80C. Even in the case of long term returns from equity funds, no tax is applicable if your returns are below Rs.1 lakh.
Both mutual funds and ULIPs have their respective merits and demerits. So, weigh in the pros and cons of both the avenues and then choose a suitable product based on your financial goals and requirements.
Disclaimer: Investment in securities and other investment products is subject to market risks; read all the related terms and documents carefully before investing.
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