July 23, 2019 Last updated July 23rd, 2019 157 Reads share

How Is ULIP Better Than Mutual Fund?

Is ULIP Better Than Mutual FundImage Credit: Deposit Photos

A ULIP VS mutual fund is a debate that has been raging throughout the last ten years. While there is nothing particularly contentious if the potential customer has his preferences stratified, the trouble begins when one does not have a transparent perspective. Of course, objective coordinates do have a substantial bearing on the subject. However, the point is to comprehend the objective issues from a clarified subjective reference.

The debate was renewed post the 2018 budget which had proposed a ten percent long term capital gain tax on equity-related funds. This led the insurance market to further lean on ULIPs as a better means of investment. However, there are aspects as well. 

Benefits of ULIPs

The following are some of the fundamental benefits of ULIPs

  • First and foremost, investors looking particularly for long term investments with a view to simultaneously save should go for ULIPs. ULIPs are especially appealing as long term instruments that also facilitate substantial savings.
  • As long term planning is specifically catered to by ULIPs, the investor may plan for his child education, gradually build his or her retirement corpus, etc. Toward that ambition, unit-linked insurance plans require one to stay invested at least for a decade to generate substantial returns. Partial withdrawals are also available as options.
  • While ULIPs are appealing in their long term aspects, they began to attract more investors after the imposition of the regulatory cap. This ensured that they returned a relatively higher rate of returns.
  • Incentives abound. For instance, the most obvious benefit is the Guaranteed Loyal Additions earmarked for those who stay invested for at least a decade which is anyway the norm in long term ventures.
  • The position of ULIPs is a lot more improved now. With taxation on all charges except the fund management charge slashed, the schemes are better positioned to consolidate the internal rate of return. A ten percent tax on the fund management expenses has been retained.
  • Additionally, the biggest advantage of the best unit linked insurance plan over mutual funds is that the former is comparatively flexible in that it allows the investor to make decided switches between funds without entry or exit charges involved which is the case with mutual funds.
  • Since ULIPs allow investors to switch between funds, they cater to a more diverse spectrum of investment preferences. Additionally, once may also avail of relevant tax benefits under Section 80C of the Income Tax Act of India.
  • Apart from standard tax benefits, ULIPs also provide tax benefits on maturity proceedings. However, there are conditions. One should stay invested for at least five years, and the sum assured is at least five times the annual premium.
  • While the influence of core market dynamics is always prevalent, it is slightly sobered in the case of ULIPs which do not necessarily bear the direct impact of objective contours.
  • Another obvious benefit of ULIPs over mutual funds is that the former allows the investor to manage his or her portfolio. The course of the investment is solely in the hands of the policyholder which consequently makes switches easier and more affordable.

Which to Choose?

As mentioned at the outset, the choice over ULIP VS mutual funds verily counts on the preferences of the concerned policyholder. So far as mutual funds are concerned, it may be said that they are productive schemes and are meant to address immediate or short term financial goals. ULIPs, on the other hand, is meant to cater to distant financial goals. So depending on the priority, one can place his choice.

Objectively, there are certainly some points of contention. For instance, so far as mutual funds are concerned, they are better prospects in terms of prospective wealth creation irrespective of taxation. Additionally, it is equally important to keep in mind that the risk factor is negligible. That explains the popularity of mutual fund schemes among scores of conventional investors who have a low-risk appetite. All said and done; the point is to orient one’s investment focus. Should one aim for flexibility, ULIPs are certainly the best choice. If not, one should go for mutual fund schemes.

So far as long term plans are concerned, not everyone may be capacitated to cater to them patiently. In that case, ULIPs are especially helpful in that they instill the investor with the discipline of sticking too long term goals. Additionally, the dual advantage of ULIPs cannot be overlooked. They provide both long term investment and protection benefits. At the same time, ULIPs fail at least in one aspect which is the investor’s inability to liquidate the scheme during the first five years. However, since investors generally stay for at least a decade, that should not be an issue.

Also, there is yet another aspect to be considered. While ULIPs are certainly meritorious in many aspects, not all investors look for core insurance coverage in ULIPs as they would already have premium covers in traditional insurance schemes. In that case, they must needlessly shell out an additional premium for redundant protection. So far as the LTCG tax is concerned, it cannot be applied until the money is redeemed. So these are necessary implications to consider before taking up ULIPs. Apart from that, so far as switching funds are concerned, one cannot do that for the first five years.

Conclusion

The contentions mentioned above need to be assessed thoroughly before deciding to take up an insurance scheme. Fundamentally, in terms of popularity, mutual funds score better compared to ULIPs. However, as stated at the outset, the choice depends on the subjective financial preferences of the concerned investor. The investment perspectives shift dramatically according to the priorities of the policyholder concerned. While the assessment is important, it is eventually up to the investor to decide upon the most appropriate course of action. Both objective and subjective facts assessed, it is nevertheless relieving to find that irrespective of the fund scheme the choice must act by the priorities of the investor.

Mutual Funds – Deposit Photos

Divesh Yadav

Divesh Yadav

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