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ULIPs vs Mutual Funds – Where To Invest In To Get Best Returns in 2022

Let us understand the detailed comparison between ULIPs and Mutual Funds to know what is best for us to invest in.

Each financial product serves a specific purpose

When it comes to investing in equities, investors have various options to choose from. Some of these include direct equity, equity mutual funds, unit-linked insurance plans (ULIPs), National Pension Scheme (NPS), etc. Each of these products serves a specific purpose while giving you exposure to equities. This article will focus on ULIPs vs mutual funds – Where to invest?

Before understanding the difference between ULIP and mutual fund, let us understand each concept.

What are mutual funds?

Mutual funds are a collective investment scheme regulated by SEBI. A mutual fund scheme collects money from various investors and invests it on their behalf as per the scheme's objectives. The investors are allotted scheme units in proportion to their investment. The scheme net asset value (NAV) moves as per the valuation of the underlying securities in the scheme portfolio. The profit or loss of an investor will depend on the difference between the current NAV and the NAV at which they purchased the units.

What is a ULIP?

A unit-linked insurance plan (ULIP) offers a combination of insurance cover and investment. At the time of purchasing the plan, the individual has to select the insurance cover and where they would like the remaining premium to be invested. The amount is invested as per the funds selected by the policyholder. The returns will depend on the performance of the underlying securities that are a part of the fund. In the case of most ULIPs, if the policyholder dies during the plan tenure, the sum assured or fund value, whichever is higher, is paid. On maturity, the fund value is paid.

ULIP plans vs mutual funds

Let us look at some of the differences between ULIPs and mutual funds.

FeatureULIPMutual fund
Basic featureA ULIP offers a combination of life insurance and investment.A mutual fund is a pure investment product. However, some AMCs are offering life insurance cover separately for some schemes.
Lock-in periodThere is a lock-in period of five years for ULIPs.In the case of most mutual funds schemes, there is no lock-in period except for two types of schemes. These include equity-linked savings schemes (ELSS) with a three-year lock-in period and some solution-oriented schemes with a five-year lock-in period.
ChargesULIP charges include mortality charges for the life insurance cover and fund management charges. The IRDAI has capped the fund management charges at 1.35%.Mutual funds charges include expense ratio, which is similar to fund management charges in ULIPs. In mutual funds, there are no mortality charges. The expense ratio charged by mutual funds ranges from 0.05% to 2.25%, depending on the type of scheme and the assets under management (AUM). Some schemes charge an exit load if the units are redeemed before a specified period.
Switching between funds/schemes and tax implicationsIn a ULIP, you can switch from one fund (for example, equity fund) to another (for example, debt fund) without any capital gain tax implications and exit loads. In a mutual fund, switching from one scheme to another is considered a redemption from one scheme and investment in another. So, the capital gain tax (if any) will have to be paid for the redemption. The exception to this is when you invest in a hybrid fund. In a hybrid fund, the fund manager does the rebalancing, and there are no capital gain tax implications for the unitholders.
Loyalty benefitSome ULIPs offer loyalty benefits to policyholders if they stay invested for a long tenure, for example, ten years or higher. The loyalty benefit is in the form of additional units that are allotted to the policyholder on meeting the eligibility criteria.In mutual fund schemes, unitholders don’t get any additional loyalty benefit for staying invested in the scheme for a longer-term.

The above table should help you choose between ULIP or mutual funds.

Which ULIP is ideal for you?

For deciding on the ideal ULIP, you should consider your risk profile, the amount of insurance, the investment time horizon, etc. ULIPs can provide you with the ideal combination of life insurance, returns, and tax benefits.

To start investing in mutual fund SIP schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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