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Which is better, ULIP or Mutual Fund?

ULIP is an insurance product that offers investors both insurance and investment under a single integrated plan. The policyholder can make use of the top-up facilities, switching between funds, reduce or increase the level of protection, additional riders and option to surrender.

Mutual Fund on the other hand is an investment program that is funded by shareholders that trades in diversified holding and which is professionally managed. The investment risk is spread across the different holdings. You can truly diversify your holdings with a small amount of money. Mutual Fund makes it easier for you to invest in stocks and bonds.

ULIP vs. Mutual Funds

Equity ULIPs and equity Mutual Fund invests their money in stocks. It makes the short term returns unpredictable. What makes it different is that when you buy an equity ULIP, the money is used to buy mutual fund units which in turn buys stocks. ULIP also provides insurance benefits in addition to the investment benefit. Following is a comparison between ULIP and Mutual Fund:

ULIPs vs. Mutual Funds Comparison Chart

Expenses include mortality charges for life, insurance premium allocation charge, fund management charge and admin charges.
Parameters ULIP Mutual Funds
Purpose Insurance cover along with investment benefits. Investment benefits.
Objective Long term plans that offer insurance and investment benefit. Ideal for investment for a short to medium term.
Regulatory body IRDA SEBI
Return on investment The return is variable as it is linked to Equity. The return is low. The return is variable as it is linked to Equity. The return is higher than the hybrid ones.
When should you consider Consider ULIP if you want protection and better than nominal returns in long term plans. Consider Mutual Fund when you want high returns in a long term.
How you money is utilised The premium payment towards ULIP go towards the expenses, insurance cover and equity mutual fund. The premium payment goes towards the expenses and towards stocks.
Flexibility There is flexibility in this plan as you can decide what proportion of the amount that you are investing shall be used for insurance cover and what proportion goes towards investment in equity. There is no flexibility as all the money that you are investing will be invested in equity.
Tax benefit 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 expenses to manage mutual funds is low as a certain limit is set by SEBI. The charges are for entry load, annual management charge and exit load. In most cases the entry and exit load is waived.
Investment portfolio The investment portfolio is unknown. The portfolio tracking is possible if the insurance company is declaring its holdings. Investment portfolio is declared on a quarterly basis.
Lock in period Minimum 3 – 5 years No lock in period.
Security No security No security
SIP Yes Yes
Switching options Allows you to switch between the funds linked to the plan. You will be able to change the risk return. Switching option is not available. You can only exit from the fund.
Additional benefits Additional loyalty benefits are offered issuing extra fund units. There are no additional benefits.
Ideal term Long term Short to medium term
Liquidity Not very liquid. More liquid as it is more widely traded in market.

If you are thinking of investing for 3 years, then having more portion in equity is not a good idea. If you have a higher risk appetite then opt for equity oriented mutual funds or ULIPs. If you have bought ULIP as insurance, it is better to take a term insurance to have sufficient protection as it sum assured in term insurance is higher.

GST of 18% is applicable on life insurance effective from the 1st of July, 2017

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