Find your suitable insurance plan
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5 min read
Updated on Mar 13, 2023
Akshay and Amit have been friends since their college days and both of them bagged their job in the same company. Now that they are financially independent, they are giving thoughts on some investment options. Akshay chose ULIP and invested INR 50,000; while Amit put his money in mutual funds.
Now, from the next month, a certain amount from Akshay’s salary is deducted as term cover. This cover provides him life insurance that is worth INR 5 lakhs. The difference is that in case of death of either of them, the family of Akshay will receive the term cover of INR 5 lakh, or at least the value of the invested fund, whichever is higher. However, Amit’s family will not receive the same.
Hopefully, this example will give us an idea of the basic difference between ULIP and mutual funds.
The full form of ULIP is Unit-Linked Insurance Policy. It is a life insurance policy that offers a combination of risk cover as well as investment. This can be called a unique offering that will enable you to avail the benefits of both assets and life insurance cover under one plan.
Also Read: 11 ULIP Charges You Should Be Aware Of
Mutual Fund is a pure investment product, which is a single financial trust. In this, money is pooled together from various investors in several market-linked funds so that a return is earned. Mutual Fund can invest in either or both equity and debt. In the financial market, it has been a popular investment option for long-term wealth creation. It is one of the most common options for investments today. There are several types of Mutual Funds that you can find in India, which include Debt Mutual Fund, Equity Mutual Fund, and many other types of funds.
The expenses that are covered include insurance premium allocation charges, mortality charges for life, fund management charge, and admin charges.
| Parameters | ULIPs | Mutual Funds |
| Purpose | Insurance cover along with investment benefits. | Investment benefits. |
| Objective | Long-term plans that come with insurance and investment benefit. | Perfect for investment for the short to medium term. |
| Regulatory body | IRDA | SEBI |
| Return on investment | The return is variable since it is linked to Equity. The return is low. | The return is flexible since it is linked to Equity. The return is higher as compared to the hybrid ones. |
| When should you consider | Consider ULIP if you want protection as well as better than nominal returns in long-term plans. | Consider Mutual Fund if you are looking for high returns over a period. |
| How your money is utilized | The premium that you pay for ULIP goes to the expenses, insurance cover, and equity mutual fund. | The premium that you pay goes to the expenses and stocks. |
| Flexibility | This plan is flexible as you can decide the proportion of the amount that you will invest and it will be used for insurance cover and the proportion that will go towards equity investment. | There is no flexibility as all the money that you are investing will be invested in equity. |
| Tax benefit | This is available under Section 80C. | Under ELSS of Section 80C. |
| Expense | The expenses to manage ULIP are high as there is no limit set by IRDA. | The costs to manage mutual funds are low since a particular limit is set by SEBI. The charges are for entry load, annual management charge, and exit load. In the majority of the cases, the entry and exit load is waived off. |
| Investment portfolio | The investment portfolio is unknown. Portfolio tracking is likely when the insurance provider declares its holdings. | The investment portfolio is declared quarterly. |
| Lock-in period | Minimum of 3 – 5 years | There is no lock-in period. |
| Security | No security | No security |
| SIP | Yes | Yes |
| Switching options | It will allow you to switch between the funds linked to the plan. You can change the risk return. | You cannot switch since there is no option available. The only option available is exiting the fund. |
| Additional benefits | Extra loyalty benefits are offered by issuing extra fund units. | There are no extra benefits. |
| Ideal term | Long term | Short to medium term |
| Liquidity | Not very liquid. | More liquid as it is more widely traded in the market. |
Let us check out which one is a better option – ULIP or Mutual Fund.
These are the basic differences that will help you to make up your mind and choose between ULIPs and Mutual Funds.
Also Read: Beginner’s Guide to ULIPs and Their Benefits
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A Unit-Linked Insurance Policy (ULIP) is a type of insurance product that combines insurance coverage and investment features. A part of the premium paid towards the policy goes towards the insurance coverage, while the remaining part is invested in various investment instruments such as stocks, bonds, or mutual funds.
A mutual fund is a type of investment vehicle that pools money from various investors to invest in a portfolio of stocks, bonds, or other securities. Investors in a mutual fund share the profits and losses in proportion to their investment.
The main difference between ULIP and mutual funds is that ULIPs combine insurance and investment features, while mutual funds are pure investment products. In a ULIP, a part of the premium paid goes towards insurance coverage, while the remaining amount is invested in various instruments. In a mutual fund, the entire investment amount is used to invest in a portfolio of securities.
The main benefit of a ULIP is that it offers insurance coverage along with investment features. ULIPs also offer tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Additionally, ULIPs offer flexibility in terms of switching between investment options and choosing the level of insurance coverage.
The main benefit of mutual funds is that they are a pure investment product that offers diversification, professional management, and liquidity. Mutual funds offer the flexibility to invest in a variety of investment options, such as equity, debt, and hybrid funds. Additionally, mutual funds offer tax benefits under Section 80C of the Income Tax Act, 1961.
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