Mutual Fund VS. ULIP

Mutual Fund

When you are looking to grow your wealth, either to create a financial safety net for your loved ones or to achieve a life goal of yours; there are various financial instruments you will come across. They provide you with the opportunity to invest and get good returns on your investments. Two such instruments are ULIPs and Mutual funds. What are these two instruments? And which one provides more benefits? Read on to get a better understanding.

What is ULIP?

A ULIP is a type of life insurance which provides you with the dual benefits of insurance and investment in a single policy. The investment aspect allows you to grow your wealth and achieve financial independence. Insurance allows you to financially protect your loved ones from life risks. These benefits are funded by the premiums paid towards the policy.

What is a Mutual fund?

A mutual fund allows you to invest your money in equity markets and get returns on the investments. Mutual fund investments are usually short-term investments. As your money is primarily invested in stocks of market-listed companies, your investments are exposed to a higher-risk factor. This means your returns could be lower than expected.

Which one is better than the other?

To understand the advantages of one financial instrument over the other, few benefits have been listed below:

  • Purpose

In ULIPs, you get to invest in a fund and get life insurance cover both in the same policy. You can grow your wealth by investing in equity and debt funds. These investments grow when you stay invested for a longer duration. On the insurance part, your family gets death benefit, in the event of your untimely demise. This can help you family avoid financial turmoil.

On the other hand, mutual funds are only for investments. Your money is invested in market-linked options, and you get returns after it matures. However, no insurance cover is provided for life risks. This means that you will have to invest in a separate life insurance policy for the safety of your loved ones

  • Transparency

Among the many ULIP benefits that you get in the policy, transparency is also included. The investments that you make and the returns that you get can all be tracked in ULIPs. This can be helpful when you want to switch your investments. In ULIPs, you invest in either equity funds or debt funds. While equity is a high-risk, high-return type of fund, debt is a low-risk, low-to-medium return type of fund. If you have invested in both, you can reallocate the investments from one fund to another. This helps in balancing your investments, maintaining your returns and reducing the risk factor. 

This transparency is not offered in a mutual fund. Investments in mutual funds are only in the equity funds, with no option of switching to a different fund type. 

  • Tax benefits

In ULIPs, you get tax benefits not just on your premium payment, but also on the maturity benefit of the policy. Premium payments of up to ₹1,50,000 are eligible for tax exemption under Section 80C of the Income Tax Act. The maturity benefit that you or your loved ones receive from the policy are tax exempted under Section 10(10D) of the Income Tax Act. Under certain conditions of Section 10(10D), partial withdrawals from ULIPs are also eligible for tax deductions.

In mutual funds, only premium payment is tax exempted. The premium limit is the same as that of a ULIP. So is the section of the Income Tax Act. However, the maturity benefit of the mutual fund is taxed. About 10% tax is levied on the payout that you receive from your mutual fund investment.

As you can see, a ULIP’s benefits give it an edge over mutual funds. Its because of these benefits that many people have started investing in ULIPs, to increase their wealth for a better future, and to safeguard their loved from financial burden and instability in their absence. You can use the ULIP calculator from the website of any life insurance company to understand how a ULIP works.


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