Mutual Funds vs ULIPS – Where should you Invest | Difference and Comparison | An ETMONEY Study

Published on June 8, 2021

Best guide related to Investment Advice, Best Stock Investment Strategy, and Do I Need International Funds, Mutual Funds vs ULIPS – Where should you Invest | Difference and Comparison | An ETMONEY Study.

Mutual funds vs ULIPs (Unit Linked Insurance Plan) often compete with each other. It’s a battle that has been going on for some time now with both factions using fund performance, charges, asset classes, product flexibility, transparency, taxes, and even advocacy and competitive disinformation as their weapon of choice.

In this video, ETMONEY’s Shankar Nath too shall enter the war room as he takes us through a detailed SWOT analysis of Mutual funds and ULIPs (Unit Linked Insurance Plan) across 9 different parameters of comparison.

What’s covered in this video?
00:00 Introduction
01:13 Tax Benefits
03:38 Built-in Insurance
04:43 Lock-in Period
06:03 Charges and Costs
09:43 Fund Options & Asset Classes
12:16 Performance
14:11 Loyalty Benefits
14:56 Switching and Rebalancing
15:51 Transparency
16:56 ETMONEY Opinion

ULIPs – There are two tax benefits that are generally offered

1. The benefit of tax deductions under different sections of the Income Tax Act on the amount invested
2. Low or no taxes on maturity proceeds and capital gains

Mutual fund – most schemes do not carry any tax benefits

The one exception to this is the funds under the ELSS or equity-linked savings scheme category … that do qualify for deduction under Section 80C of the Income Tax Act.

With regards to taxes on capital gains mutual fund investors have no respite and have to pay tax on short-term and long-term capital gain across all mutual fund categories including ELSS funds.

ULIPs come with a built-in life insurance cover. Mutual Funds don’t come with a life cover.

ULIPs have a lock-in period of 5 years .. which from a comparison perspective .. is similar to that of the National Savings Certificates or a tax-saving fixed deposits.

Most mutual funds come with no lock-in window. There are only two exceptions to this

ELSS or tax saving mutual funds, the lock-in period is 3 years
There are some solution-oriented mutual funds like a Children’s fund or a Retirement fund where the lock-in is 5 years

There are thousands of mutual fund schemes across dozens of categories.
In fact, fund choices are one area where mutual fund companies outscore ULIPs.
ULIPs don’t have many fund options .. and often come with the standard equity and debt variants.

Our Analysis shows that category performance of ULIPs was lower than the category returns of a mutual fund but was not alarmingly low. It is somewhat in the acceptable range

There are two issues with the ULIPs:

1. Because of the charges .. the amount of money that goes into investments is lower in a ULIP as compared to a mutual fund.
2. ULIPs don’t have a porting feature. This means that if you are not happy with the investment performance of your insurance company’s ULIP plan .. you don’t have the option of moving your portfolio to another insurance company which might have a better investment team.

Mutual funds offer no loyalty benefits to their unitholders. On the other hand, new-age low-cost ULIPs have come out with loyalty benefits for their policyholders.

These are in the form of additional units that are allotted to policyholders if they stay with the fund for longer durations like 5 years, 10 years, or more. This is done to ensure the policyholders stay invested for long.

One of the bigger advantages with ULIPS .. and something that is not available with mutual funds … is the switching and rebalancing facility.

ULIPS allows policyholders to move units .. fully or partially .. from one fund to another .. without attracting an exit load or any form of taxes.

In mutual funds .. when one wants to rebalance his or her portfolio from one asset class to another .. like from equity to debt .. one has to sell some units of equity and purchase corresponding units of debt.

ULIPS have a good story to tell. Afterall, they are an investment product that comes with built-in insurance cover, tax benefits, loyalty benefits and seamless switching options.

Mutual funds too have an equally good story in them with better performance, lower expenses, more fund choices and no lock-in period.

In our opinion .. the choice between a ULIP or mutual fund .. comes really down to the understanding of how either product fits into your investment plan.

#ETMONEY #UnitLinkedInsurancePlan #MutualFund

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