ULIP or Term Insurance + Mutual Fund Investment: Which Is Better?

Prasanth Menon

01 Jun 2017

New Page 1

Let’s say you were selecting a team for IPL. Who would you have in your team? Would it be all bowlers? Or all batsmen? Or Just wicketkeepers? No right! However, if given a chance, you would want to select a team that has all round players. On occasions, such team could do well. However, there would be occasions when you would want a specialist bowler, opening batsmen, wicketkeeper, middle-order batsmen and a spinner. The case is similar when it comes to your investments. Occasionally, you would want your investments to be multipurpose. However, on occasions, you would want some specialist investments to take you over the boundary line.

Let’s revisit two such investment avenues that are usually confusing. One is unit-linked insurance plan (ULIP, the team with all all-rounders) and other is insurance+mutual fund investment (the team with specialists).

Features of insurance + Mutual funds

When you want to invest with an objective in mind, you usually tend to invest in mutual funds. If you want to invest for tax saving purposes while insuring yourself against unforeseen circumstances, you buy a term insurance with various riders. You individually can get the best of both worlds when you invest in insurance and mutual funds. Let’s look at the advantages of this type of investments:

  • There is no lock-in period; cashing out your funds is simpler

  • Because you buy a term plan, it is comparatively cheaper

  • If you feel that your mutual fund investments are not performing, you can easily switch your investments

  • You could simultaneously invest in multiple categories of mutual funds

  • You can withdraw from the mutual funds while retaining your term insurance

  • You have the option to counter inflation or other economic turmoil by smartly planning your investment and premiums

Features of ULIP

Unit-linked insurance plans or ULIPs bring you the best of both worlds. When you invest in ULIP, a part of your investment is directed as premium payment for an insurance plan and a part of your payment is directed to buy equities or into debt funds as per your risk appetite. The advantages of ULIPs are as follows:

  • You need not keep track of your investments; you just need to pay the premium

  • You can easily choose and switch between your fund options

  • Some ULIPs also allow you to increase your life covered

  • You can also increase your premium amount to maximize the returns

  • ULIP investments can be for different goals as well; you need not invest just for investing

  • Tax benefits while providing insurance and allowing you to invest

  • Triple tax benefits structure is applicable

  • You may also make partial withdrawals but only after the lock-in period

  • Though you invest in market that is risky, you still get some assured benefits and also have your life insured

  • You need not pay dual insurance-related and mutual fund associated charges

  • The entire investment does not include any service tax other than the mortality charges

ULIPs and Mutual funds+Insurance toe-to-toe

Let’s look at how ULIPs and mutual funds+Insurance fare toe-to-toe on factors that are not already mentioned above.

Unit Linked Insurance Plans

Mutual Funds + Term Plan

Every ULIP has a cost linked with it.

MFs too, have cost attached. Term plan added brings additional cost.

They provide transparency and flexibility as compared to other investment options in insurance segment

Transparent product. All costs are declared.

Initial tax is saved under 80C. So premium paid up to 1 lakh can save up to 30K depending on the tax bracket.

80C is provided by specific schemes only. These schemes have a lock-in for 3 years essentially.

The final amount at maturity is tax-free under section 10(10D). Thus the income is tax-free for self as well as the nominee.

Long term/ short term capital gain taxes are applicable.

The whole investment amount does not bear any service tax other than the mortality charge.

Other than these tax saving ones, lock- in is not applicable

Thus, we can see that both of these investment avenues have their own advantages.

Conclusion

ULIPs and mutual funds+insurance have their own advantages. Now that you know them, you can make an informed decision before you plan your investments. Either of these investments has the potential to fulfill your goals while insuring yourself against unforeseen circumstances.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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ULIP or Term Insurance + Mutual Fund Investment: Which Is Better?

Prasanth Menon

01 Jun 2017

New Page 1

Let’s say you were selecting a team for IPL. Who would you have in your team? Would it be all bowlers? Or all batsmen? Or Just wicketkeepers? No right! However, if given a chance, you would want to select a team that has all round players. On occasions, such team could do well. However, there would be occasions when you would want a specialist bowler, opening batsmen, wicketkeeper, middle-order batsmen and a spinner. The case is similar when it comes to your investments. Occasionally, you would want your investments to be multipurpose. However, on occasions, you would want some specialist investments to take you over the boundary line.

Let’s revisit two such investment avenues that are usually confusing. One is unit-linked insurance plan (ULIP, the team with all all-rounders) and other is insurance+mutual fund investment (the team with specialists).

Features of insurance + Mutual funds

When you want to invest with an objective in mind, you usually tend to invest in mutual funds. If you want to invest for tax saving purposes while insuring yourself against unforeseen circumstances, you buy a term insurance with various riders. You individually can get the best of both worlds when you invest in insurance and mutual funds. Let’s look at the advantages of this type of investments:

  • There is no lock-in period; cashing out your funds is simpler

  • Because you buy a term plan, it is comparatively cheaper

  • If you feel that your mutual fund investments are not performing, you can easily switch your investments

  • You could simultaneously invest in multiple categories of mutual funds

  • You can withdraw from the mutual funds while retaining your term insurance

  • You have the option to counter inflation or other economic turmoil by smartly planning your investment and premiums

Features of ULIP

Unit-linked insurance plans or ULIPs bring you the best of both worlds. When you invest in ULIP, a part of your investment is directed as premium payment for an insurance plan and a part of your payment is directed to buy equities or into debt funds as per your risk appetite. The advantages of ULIPs are as follows:

  • You need not keep track of your investments; you just need to pay the premium

  • You can easily choose and switch between your fund options

  • Some ULIPs also allow you to increase your life covered

  • You can also increase your premium amount to maximize the returns

  • ULIP investments can be for different goals as well; you need not invest just for investing

  • Tax benefits while providing insurance and allowing you to invest

  • Triple tax benefits structure is applicable

  • You may also make partial withdrawals but only after the lock-in period

  • Though you invest in market that is risky, you still get some assured benefits and also have your life insured

  • You need not pay dual insurance-related and mutual fund associated charges

  • The entire investment does not include any service tax other than the mortality charges

ULIPs and Mutual funds+Insurance toe-to-toe

Let’s look at how ULIPs and mutual funds+Insurance fare toe-to-toe on factors that are not already mentioned above.

Unit Linked Insurance Plans

Mutual Funds + Term Plan

Every ULIP has a cost linked with it.

MFs too, have cost attached. Term plan added brings additional cost.

They provide transparency and flexibility as compared to other investment options in insurance segment

Transparent product. All costs are declared.

Initial tax is saved under 80C. So premium paid up to 1 lakh can save up to 30K depending on the tax bracket.

80C is provided by specific schemes only. These schemes have a lock-in for 3 years essentially.

The final amount at maturity is tax-free under section 10(10D). Thus the income is tax-free for self as well as the nominee.

Long term/ short term capital gain taxes are applicable.

The whole investment amount does not bear any service tax other than the mortality charge.

Other than these tax saving ones, lock- in is not applicable

Thus, we can see that both of these investment avenues have their own advantages.

Conclusion

ULIPs and mutual funds+insurance have their own advantages. Now that you know them, you can make an informed decision before you plan your investments. Either of these investments has the potential to fulfill your goals while insuring yourself against unforeseen circumstances.