Mutual Funds Vs ULIPs

There are certain factors which one must look while choosing between the mutual funds and ULIPs.

Investment purpose

If we ask people why they are opting ULIP over a mutual fund the clear answer would be that along with investment, insurance cover is also available. But here people must first decide what they actually want, a product which can give you adequate returns to achieve your desired financial goal or an adequate insurance cover. A person with adequate insurance cover may opt to invest in ULIP.

Return

Equity mutual funds have outperformed ULIPs, historically. Even a small difference of 1 per cent to 2 per cent over a long period of time can change the corpus to a great extent, thanks to the compounding effect. The following table will show you the difference between the returns of ULIP and mutual fund.

Liquidity

Liquidity proves to be one of the important parameters for picking an investment product. It is prudent to invest in the product which you are able to liquidate when you need them. Open-ended equity mutual funds are highly liquid. ELSS (Equity Linked Saving Scheme) is an exception to this which has a lock-in period of three years. On the other hand, ULIP has a lock-in period of five years.

Cost

Previously ULIP used to have high charges but now to compete with the mutual funds they have reduced their charges. If ULIPs are invested via online mode, an investor doesn’t need to pay administrative or fund allocation charges. In this respect, mutual funds have also further reduced their TER (Total Expense Ratio) by offering direct plans.

Taxability

ULIPs are more tax-efficient than mutual funds. Whether it is equity or debt, capital gains from the ULIPs are tax-free. On the contrary, equity mutual fund investor has to pay 15 per cent tax on STCG (Short Term Capital Gain) and 10 per cent on LTCG (Long Term Capital Gain). In case of debt mutual funds, STCG is added to the individual’s income and is taxed as per the income tax slab rate, while LTCG is taxed at 20 per cent with indexation benefit.

While selecting an investment one must not just concentrate on a single factor. ULIP can be an option for the one who is adequately insured. The combination of term insurance with mutual funds can be a better bet over ULIP.