A very common question among investors which instrument is better – Ulips or Mutual Funds (MF). Before you start thinking which instrument to invest, let’s first understand these two financial instruments.
ULIPs – Unit Linked Insurance Plans
Popularly known as “ULIPs”, it is an investment option provided by Insurance Companies. It is a single contract comprising of insurance cover with an investment benefit. The insurance company allots units to the ULIP investors and the net asset value (NAV) is calculated and declared on a daily basis. An investment in ULIP is divided into two parts – a) Life Cover Premium b) Investment. Premium paid in ULIP, certain portion goes for life cover and the remaining portion goes for investment.
Mutual Fund is an investment instrument which pools money from many investors and invest in (stocks, bonds, money market instruments). The company allots units to the MF investors and the current value of such investments is calculated on a daily basis and the same is declared through the Net Asset Value.
Difference between ULIPs and Mutual Funds
The basic difference between ULIP and MF is in terms of insurance cover. A ULIP provides a insurance component whereas a MF is a pure investment product. Generally speaking, ULIPs are mutual funds with an insurance cover.
ULIP = Mutual fund + Insurance cover
Now after understanding the difference between ULIP and MF, let’s understand in detail which is better investment option – ULIP or MF.
Parameters for comparison
a) Expenses – Expenses incurred in a MF is lesser than the expenses of ULIPs. The reason is expenses in a mutual fund is capped, there is a pre-set upper limit, whereas for ULIPs no upper limit in terms of controlling the expenses is set by the insurance company.
b) Tax benefits – Any investment made in ULIP qualifies under 80 C of income tax act, where an investor can save tax on Rs 1,00, 000. In case of MF, only investment in ELSS (equity linked tax savings scheme) a specific type of mutual fund scheme qualifies for tax benefits under section 80 C.
d) Portfolio disclosure – MF houses are required to statutorily declare their portfolios on a quarterly basis, however there is no such statutory requirements for ULIPs.
e) Return on investment – As both the products are long term investment products, these products have given good returns to its investors. Many analysts’ feels, from a long term view ULIP provides better return than MF. However this is not true in all cases, it all depends on the type of investment and the fund manager’s skills in managing the funds.
Considering all the above factors, a mutual fund investment is better than ULIPs.
Insurance is meant for your future protection and it takes care of uncertainties in the future. However a MF is meant for only investment. As we investors do not have the expertise to invest in the stock market and other financial instruments, it is possible through MFs.
What is the best investment option?
The best investment option available for anyone is – A low-cost term insurance and a good equity mutual fund is the best option available to every investor.