Are ULIPs Equal to Mutual Funds?

A mutual fund is an investment instrument that allows you to invest on a wider scale in the capital markets. Consider an equity index mutual fund to better understand this. Thanks to the fund house, you have a stake in all of the stocks that make up the index at any one moment if you invest in an index mutual fund. The growth of your money invested in a mutual fund is determined by the performance of the securities in the fund basket. A ULIP, on the other hand, allows you to invest in a fund with an underlying basket of stocks while also offering life insurance in one package. A ULIP is a two-in-one plan that provides both investment and insurance protection.

ULIPs vs Mutual Funds: A Comparison

A few analogies between ULIPs and mutual funds are as follows:

• Additional Protection against ULIPs

Some ULIPs on the market have riders or built-in benefits that give additional protection. These ULIP products are appropriate for customers who are putting money aside for a specific purpose and are afraid that their needs will not be satisfied if the product becomes unavailable in the future. One example is saving for a child's education. Several ULIP plans give a lump sum insured amount upon the death of the parent to meet these demands. Furthermore, the company continues to pay the fund's premiums on the parent's behalf. 

• Tax-savings

Section 80C of the Internal Revenue Code allows for tax deductions on ULIPs. The amount you invest in a ULIP reduces your overall taxable income. As a consequence, the amount of income tax you owe to the government is lowered. Mutual funds, on the other hand, may or may not assist you in reducing your tax liability. These tax advantages are only available through ELSS, or Equity-Linked Savings Schemes.

• Charges

At first appearance, ULIPs and mutual funds appear to be similar since they both invest in a range of assets. Both, on the other hand, are built differently, which explains why the costs are different. An exit fee, which is a payment for selling goods in the plan before the conclusion of the investment term, is all that a mutual fund costs you. ULIPs, on the other hand, charge fees under various categories. There are three types of fees: premium allocation, administration, and management. The amount you invest in a ULIP includes the insurance premium. This is referred to as a "mortality charge." In contrast, ULIP Fund Management Charges are lower than Mutual Fund Fund Management Charges, at 1.35 percent and 2.5 percent, respectively. In addition, the insurance regulator, the IRDAI, mandates that total effective costs on ULIPs not exceed 2.25 percent. This implies that a ULIP's total costs can never exceed those of a mutual fund. Overly expensive charges go into your profits. As a result, your ULIP returns are expected to be on par with or better than mutual fund returns over time.

• More Alternatives

There are thousands of mutual fund plans to pick from, depending on your risk and return objectives. There are also funds that track a stock market index like the Sensex or the Nifty. ULIPs don't have nearly as much variation. ULIPs, on the other hand, may provide a variety of options depending on who you want to protect—yourself in retirement, your children, and so on. 

Take Away

There are moments in life when you need a huge quantity of money. These include the purchase or construction of a home, your children's higher education and marriage, and retirement life. You must identify the investment opportunities that will generate the highest returns based on your risk profile and inflation rate. The stock market has the potential to generate the highest returns of any investment choice, but it also carries a significant amount of risk.

Do read - Who Should Invest In A ULIP Plan?