Confused between ULIPs vs Mutual Fund? A Quick Guide
13 Jun 2017
Nutan Gupta
New Page 1
The
moment when you have made up your mind to invest your money is clearly euphoric. You
realize the potential of earning good profits in the near future and are satisfied with
the way you are planning to secure your future. But this is just the beginning of the
tough world decisions. Finance is complex and so are the decisions involved with it.
Deciding on which product to invest is a long debate with yourself as well as your
manager. Stocks, insurance, bonds, mutual funds or ULIPs, the list is endless. We help you
resolve the long standing debate between investing in ULIPs or Mutual Fund with this
article.
What is ULIP?
ULIP
or Unit Linked Insurance Plan is a life insurance product. A ULIP ideally is an
insurance cover plan for the policy holder with the benefit of opting to choose for any
number of investment options such as stocks, bonds or mutual funds. The ULIP plan acts as
a single integrated plan, so the dual benefits of investment and protection can be enjoyed
according to the specific needs and choices of the investor.
ULIPs
require the investor to pay a regular premium for the policy cover as well as the
investment made in stocks and bonds for wealth appreciation. However, the premium amount
is paid for both the parts only once. A part of the premium paid goes towards providing
the policyholder insurance cover, and the other is invested in stocks and bonds for wealth
appreciation. A policyholder has the freedom to choose the financial product it
would like to invest in as a part of the ULIP according to his risk appetite.
What is Mutual Fund?
Mutual
fund is an investment scheme wherein many investors come together to invest their money
through a collected pool. The collected corpus is under the care of a fund manager-a
financial expert hired specifically to invest the collected money in different financial
products such as stocks, bonds, and other asset classes. The investors in a mutual fund
enjoy the dividends after a particular time frame. The dividends can be reinvested into
the scheme to enjoy a greater profit at the time of exit.
While
ULIPs and Mutual funds always keeps a smart investor busy with the thinking business, lets
grab an overview on the similarities between the two.
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ULIPs
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Mutual
Fund
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There is definitely a
risk involved in investing in ULIPs. ULIPs face the risk of defaults and changes in the
rates of interest.
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The risk involved in
investing in this financial product is higher as the equity investment is dependent on
market fluctuations and a fund manager’s decision.
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An investor with the ULIP
is awarded shares on the net asset value basis and the individual investor has the liberty
to invest the money in any financial product of his choice.
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While investors in mutual
funds definitely have shares with them, the discretion to invest in a financial product
solely lies with the fund manager.
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While the similarities between the two are few, the points of
contention are many and varied. Let’s look.
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ULIPs
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Mutual
Fund
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A ULIP is a two way
investment into insurance as well as core investment product of an investor’s choice.
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A mutual fund is a core
investment product.
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A ULIP is a carefully
planned out financial investment with the help of a financial advisor who determines the
monthly premium on the basis of the investor’s income and expenses for a specific
time period.
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A mutual fund investment
can begin with as basic as an amount of 500 Rs per month for a minimum period of 12 months
as a systematic investment plan (SIP).
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The exit from the ULIP
plan before its maturity requires the investor to bear the financial implication.
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There are no penalty
implications to be borne by the investor in case of the discontinuation of the SIP.
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The expenses for ULIP
are high as the Insurance Regulatory and Development Authority (IRDA)prescribe limits only
in certain cases, thus an insurance company has an upper hand in determining the
investor’s expenses. The high premium allocation charge is ruled to be not exceeding
10% of premium. With this are the additional charges of mortality, fund management
charges, policy administration charges among others.
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Expenses though seem to
be lower for the mutual funds with the Securities and Exchange Board of India (SEBI)
setting the upper limits for expenses, expenses charged by mutual funds to investors for a
range of activities like fund management, sales and marketing, administration are subject
to certain limits. Charges over and above the specified limit if any are borne by the fund
house instead of investors.
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ULIPs have an investment
period determined, with a minimum of 5 years locked in from the very onset of the first
transaction.
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Mutual funds have the
ease of being changed into liquid asset conveniently as they are traded in the market on a
regular basis. However, all mutual funds are not liquid in nature with ELSS being the most
apt example.
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ULIPs are also expected
to submit their quarterly reports before the investors.
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Investors of the mutual
funds, according to the SEBI guidelines need to quarterly updated on the numbers of their
portfolio. However, a monthly practice is followed by industry to ensure a transparency
between the fund manager and its investors.
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ULIPs allow the investor
to choose the sum that he wants to be invested in equities and in insurance cover.
Investors are also given the option of entry and exit from a mutual fund whenever they
want.
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The decision of entry
and the exit point of the investment relies with the fund manager with no flexibility to
change the asset allocation midway.
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ULIPs allow the investor
tax relief up to a limit specified under the Section 80
C of income tax with the proceeds also remaining tax free in the hands of the investor.
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ELSS is
the only financial product while provides tax relief under the Section 80 C. A minimum of
1 lakh are allowed as deduction. The proceeds of the mutual fund
do not give the investor relief from tax payments and attract
redemption charges. Non-ELSS funds have different terms and conditions for the tax
implications depending on the nature of the mutual fund.
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Making a decision between the two is indeed difficult, however
if liquidity is a cause of concern for you then mutual fund is a safer bet with no lock-in
period. ULIP should ideally be an option for an investor if he wishes to switch funds in
between or aims for lower costs with less risks in the long run.
Whatever
the choice, we wish you the best in all your financial planning.