Are new age ULIPs the same as mutual funds?

Mutual funds have been a popular investment option for wealth creation. However, since the past few years, ULIPs or Unit Linked Insurance Plans have become an equally worthy option for safeguarding wealth along with providing a personal life insurance cover.

Under new age ULIPs, there are a host of choices available under both investment plan and life insurance cover. Moreover, the investment component of this plan works similar to that of a mutual fund portfolio, making them almost alike.

What are mutual funds?

Typically, a sum of money pooled in by a large number of investors is what refers to a mutual fund. It is a trust that gathers money from individuals having a common investment objective. A professional fund manager manages this fund and invests the sum in bonds, equities, and other market securities.

Under a mutual fund scheme, each investor holds a particular number of units. These units represent a segment of the fund holding. Further, the gains or income generated from this collection gets distributed proportionately amongst all investors after deducting certain expenses. This process considers the scheme’s Net Asset Value (NAV).

Here are a few benefits of investing in mutual funds:

● Most mutual funds schemes offer flexible withdrawals. Thus, you as an investor can redeem your units as and when needed.

● Investment in mutual funds helps investors build a diversified portfolio. This reduces the overall risk linked with market securities.

● A fund manager entirely manages the investment portfolio.

What are ULIPs?

Unit Linked Insurance Plan (ULIP) is a mix of investment and life insurance. The primary objective of such a policy is to offer wealth creation along with providing the advantages of an insurance policy. Here, the insurer puts a specific portion of the policyholder’s investment towards life insurance, and the remaining amount is invested in various debt or equity instruments, depending on the policyholder’s short and long-term goals.

Similar to mutual funds, there are fund managers present in the insurance company who manage these investments. In a Unit Linked Investment Plan, you as policyholders also get the flexibility to switch your portfolios based on market performance.

A few benefits of investing in a ULIP are –

● It is a multi-faceted insurance product that provides benefits of both insurance cover and mutual fund investment.

● Investors can partly withdraw their funds after the completion of the lock-in period.

● Provides various tax benefits.

Comparison between mutual funds and ULIPs

Here’s a detailed comparison of various parameters concerning mutual funds and ULIPs:

● Tax benefits

Under ULIP, the premiums paid by you are eligible for tax deductions under Section 80C. In addition, all maturity proceeds feature tax exemption under Section 10(10D).

However, as per recent Budget proposals, the tax exemption on ULIP proceeds is no longer eligible for a tax deduction if the premium is more than Rs.2.5 lakh per year. For such ULIPs, the taxation of maturity sum will be similar to that of equity mutual funds.

When it comes to mutual funds, only ELSS funds are eligible for a tax deduction of Rs.1.5 lakh under Section 80C of the Income Tax Act.

● Asset classes and fund options

As an investor, you get a number of options for asset classes under mutual funds, such as equity, debt, gold, bond, international equities, and more. On the other hand, ULIPs do not feature many fund options and often provide only standard debt and equity instruments.

● Lock-in period

ULIPs come with a lock-in period of 5 years, which might be substantial in comparison to mutual funds. However, most mutual funds have no lock-in period and allow you to redeem your units whenever you please.

Evidently, both mutual funds and ULIPs have their own set of features that make them similar and unique at the same time. Thus, investors who want to create wealth can choose either option and guide their investment through leading aggregators.

The new-age ULIPs provide a host of benefits that are at par with mutual funds. However, individuals must assess their risk appetite, investment horizon, and financial goals before choosing between the two investment options.