Investing in ULIP or in Mutual Funds? Here’s some key information to remember

A ULIP (Unit Linked Insurance Plan) combines two financial products in one bundle: life insurance and investing through a common fund.

This option is offered by insurance companies, and serves as a convenient solution for those in a dilemma between investing their spare cash and buying good life cover.

What you need to know about the ULIP

ULIP was first offered by the Unit Trust of India (UTI). ULIP products are governed by the Insurance Regulatory and Development Authority (IRDA).

When you pay ULIP premiums, a portion of the payment goes towards mortality charges - that is, the standard life cover that a Life Insurance policy offers. The remaining part of the premium is diverted towards a common cash pool, just like in Mutual Funds. This common fund pool is then used to create investments, in equities or debt instruments.

So, should you be investing in ULIP or invest in mutual funds?

As with anything in life, there is no one universal answer. It depends on personal preference. However, let us do a short comparison between ULIP and mutual funds.

ULIP and Mutual Funds

• With ULIP, investors can get the satisfaction of having put their money in a conventional product like a life cover. The investment part is a bonus
• With Mutual Funds, it is plain investment, your money gets the chance to grow, and you also stand the chance of incurring losses
• In ULIPs, expenses are a proportion of the premium, and there are several charges that can affect the amount that is actually taken towards investment
• In Mutual Funds, costs are set in proportion to the Assets Under Management (AUM). When the AUM grows, expenses gradually come down.
• ULIP plans offer the following investment choices - ULIP for Retirement, ULIP for Wealth Collection, ULIP for Children Education, and ULIP for Health Benefits. So, you can choose the goals and let that define the kind of investments made
• ULIP investments are made either in equity or debt instruments. Policyholders can switch between the two according to their changing risk appetite or age. ULIP plans allow certain number of free switches after which you have to pay a switching charge
• With Mutual Funds, you have even greater flexibility in choosing the type of investments and the term of investments. However, it is not so easy to switch between investment types
• ULIP offers tax benefits, since the premiums paid towards it are allowed for tax deduction under Section 80C of the IT Act
• ELSS is a type of mutual funds that offers similar tax savings
• In ULIP, partial withdrawals, payments on death of the insured or on maturity of the policy are tax-free
• Long-term capital gains and dividends on mutual funds are also tax-free. However, short-term returns are taxable
• In ULIP, partial withdrawals up to maximum of 20% of the policy's fund value are allowed
• Mutual funds provide more liquidity, you can sell the units at anytime and reclaim the money invested.
• Both in ULIP and Mutual funds, you can invest in a regular manner, through SIP (Mutual Funds), and through monthly premiums (ULIP)

What is the difference between ULIP and SIP? A ULIP happens to be a financial product, while SIP is an investment strategy. The difference among ULIP, SIP & Mutual Fund can be studied in depth; it’s a better idea to actually know what they are and their properties before you choose one start investing to suit your goals.

There is no clear way to define the best investment option: this is subjective to your personal opinion.