ULIPs or Mutual Funds – Where to Invest for Better Returns

With a plethora of investment options available in the market, choosing the one that yields reasonable returns for you over time can be overwhelming. In fact, even today, many young investors are confused about whether they should invest in traditional mutual fund investments or take a leap of faith and invest in unit linked insurance plans.

In such a confusing situation, understanding what ULIPs and mutual funds are will help you gain clarity on the subject. In this article, we will be discussing the same. Let us read more about ULIPs.

What is ULIP

The Unit Linked Insurance Plan (ULIP) is primarily an insurance instrument. However, due to the dual benefits offered by the policy, it can also be classified as a goal-based investment plan. ULIPs provide financial protection through life insurance cover and wealth creation through market-linked investment.

What is a mutual fund

A mutual fund is solely an investment instrument that is easily available in the market, and anyone can invest in it. You can invest in mutual funds in two ways –

  1. Either you choose to invest a lump sum amount or
  2. Make investments through SIPs (Systematic Investment Planning)

One can use the mutual fund investment strategy to accomplish short and long-term financial objectives. However, it is recommended to evaluate the risk associated with different asset classes when investing in mutual funds.

Difference between ULIPs and Mutual Funds

We will be discussing the difference between ULIP and Mutual Fund based on certain aspects, such as –

  1. Type of Investment

As mentioned earlier, ULIP is primarily an insurance instrument. Along with life insurance coverage, it also allows you to invest in market-linked funds. On the other hand, mutual funds are solely an investment option. Here, you invest money to earn reasonable returns. It does not provide life insurance benefits to investors.

  1. Tax Benefits

You can claim tax deductions for the premiums paid towards ULIPs under Section 80C of the old tax regime. The premium amount that can be availed for tax deduction is up to INR 1.5 lakh. Moreover, ULIP maturity and death benefit amount received is also tax-free under Section 10(10D) of the Income Tax Act, 1961.

When it comes to mutual funds, the ELSS mutual funds are among the best tax-saving options in India. Investments of up to INR 1.5 lakh made in ELSS mutual funds can be claimed for tax deductions under Section 80C of the old income tax structure.

  1. Liquidity

ULIP investments come with a lock-in period of five years. Thus, you cannot withdraw money from your ULIPs until the lock-in period ends. On the other hand, ELSS mutual funds are the only mutual fund options that have a three-year lock-in period. With other mutual fund options, you can enter or exit the policy depending on your financial strategy.

Where Should You Invest?

Before you choose the type of invest option to save for your future, it is necessary to know your future financial objectives. Hence, it is advisable to decide your financial goals and then choose a plan that will help you accomplish them.

A few common questions that you can ask yourself before choosing your investment strategy are as follows –

  • What are your financial goals?
  • Do you need life insurance coverage?
  • What is your investment horizon?

Apart from this, evaluate your risk appetite before investing in mutual funds or ULIPs. It is highly advisable to invest in long-term plans as they earn reasonable to high returns in the future. In case you want to determine the premiums that you will pay for the chosen ULIP, you can use the ULIP plan calculator. This tool not only helps calculate your premiums but also gives an approx. value of your returns.

Post Author: Alison Lukas