What is ULIP?
ULIP stands for Unit Linked Insurance Plans. We already know that insurance is for protecting our life from any uncertain event like death or accident. The purpose of a normal insurance plan is to just protect the life and not ensure any savings for the future. One example of a pure insurance plan is term insurance. Many people want a plan which offers them both protection and a return on their Investment. So the insurance companies came up with the idea of online ULIP, a plan where the premium amount is invested in the stock market and returns better income on the closure of the maturity period.
What are Mutual Funds?
Mutual funds are one of the invest worthy instruments, where you provide your money to a fund house and authorize them to invest and manage it for you. In return, the fund house shall pay you back through dividends/bonus (es). This is similar to fixed deposit, where a bank pays you an interest for the amount deposited. But be careful, certain mutual funds can be risky, especially those, which are linked with the share market.
Difference between Mutual Funds and Unit Linked Insurance Plans
Check the points given below, these will clear your doubts regarding what to consider before making an investment. What is a good amount to invest, are there any extra expenses, portfolio of the plan and tax benefits are some queries answered below:-
1.Amount to be Invested
ULIPs : Determined by the investor and can be modified as well.
Mutual Funds : Minimum amount to be invested is determined by the fund house.
ULIPs : No upper limits, expenses determined by the insurance company
Mutual Funds : Upper limits for expenses chargeable to investors have been set by the regulator
3. Portfolio disclosure
ULIPs : There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.
Mutual Funds : Quarterly disclosures are mandatory
4. Modifying asset allocation
ULIPs: Generally permitted for free or at a nominal cost
Mutual Funds : Entry/exit loads have to be borne by the investor
5. Tax benefits
ULIPs : Section 80C benefits are available on all ULIP funds
Mutual Funds : Section 80C benefits are available only on invested capitals in tax-saving funds
In structure both ULIP and Mutual Funds look similar. But they are different in the objectives that they plan to achieve. Because of the high first-year charges, mutual funds are a better option if you have a five-year time frame. But if you have a period of 10 years or more in your hands, then the ULIPs have an edge over Mutual Funds. Furthermore, a ULIP has high first-year charges towards acquisition; consequently, it does not outperform mutual funds in the first five years. In the long-term, ULIP managers have several advantages over the mutual fund managers. Since policy holder premiums come at regular intervals, investments can be planned out more evenly. Mutual fund managers cannot take a similar long-term view because they have bulk investors who can move money in and out of schemes at short notice.