A plethora of investment options is available these days to suit everyone’s risk appetite and financial goals. Smart investors prefer to diversify their investments instead of putting all their eggs in one basket. With so many options, it is important to research, instead of impulsively investing in any and every scheme that claims to offer high returns.
The most popular high-return investments are usually linked to equity markets. However, working professionals find it difficult to take the time out and continuously monitor their portfolios. This has led to an increase in the popularity of financial instruments like mutual funds and Unit Linked Insurance Plans (ULIP). Before understanding, which is a better investment, it is important to understand the meaning of ULIPs and mutual funds.
Meaning of ULIP
ULIP is a unique financial product that offers life insurance and investment in one plan. It secures the life of the policyholder with their life insurance aspect and provides returns to the policyholder with their investment aspect. It ensures that the life of the policyholder is protected while they earn returns that can help them achieve their long-term financial goals. The life insurance part of the ULIP ensures that if the policyholder suddenly is no more, the sum assured will be provided to the nominee. This leaves the policyholder rest assured that in uncertain times, their dependents will be taken care of.
The investment component of ULIP allows an investor to put their money in the funds of their choice based on risk appetite. Considering that the risk appetite of the policyholder is high, they go for equity funds. If it is low, they look for secure funds like debt funds. If they want to mitigate some risk, they can choose balance funds which comprise equity and debt funds. The higher the risks, the more like the returns are. Therefore, in the long haul, equity based ULIPs have been found to give higher returns than other safer choices. If you are planning to invest in a ULIP, use a ULIP return calculator online to get an estimate of the returns you will get on the fund that you choose. Also, ULIPs have a lock-in period of 5 years, after which one can avail of free partial withdrawals.
Meaning of mutual funds
Mutual funds are simply investments that are purely handled by professionals who aim to maximize the returns of the investors. Similar to ULIPs, there are several mutual funds investors can choose from based on their risk appetite. They can invest in them on a recurring basis, via a Systematic Investment Planning (SIP), or make a lump-sum investment. You will have to redeem your investment instead if you want to invest elsewhere.
What offers better returns?
The returns you can earn from ULIPs, or mutual funds depend on the funds you choose and your risk appetite. If the fund that you have selected performs well, you will generate good returns (and vice versa). Tools like the ULIP return calculator give you an estimate of the returns you will make on your investments. Since both are linked to the market, it all depends on how the markets are performing.
Here are some factors that distinguish ULIP from mutual funds as an investment option:
- Flexibility to switch fund allocation
One of the unique features of ULIP is that you can switch between your fund allocation anytime you want. This allows the policyholder to make the most of the market volatility by switching between debt and equity anytime they want.
- Offers tax benefits
The amount that you invest in ULIP is exempt from taxes according to section 80C of the Income Tax Act. Also, there are tax benefits offered on the sum assured and maturity amount.
- Provides life cover
A ULIP, along with an investment, is also life insurance that secures the lives of the policyholder and their family. It offers financial support to the dependents in case the policyholder loses their life.
- Free withdrawals
After the lock-in period of 5 years, one can avail of free withdrawals from ULIPs anytime they want. This makes it an emergency fund to access in times of need.
Since both mutual funds and ULIPs have the capability of providing high returns, it might seem difficult to choose one. It is important that as an investor; you introspect and understand your needs. If you are looking for a way to secure your life while earning returns on investment, ULIP would be a good choice. Whereas, if you are only looking for investment, mutual funds are a good option.