All of us want financial security and the opportunity to grow our money into a sizeable fund for the future. But not every person has access to, or the knowledge of, the best financial product types to invest in as per income, financial goals, family goals, size of the family, etc. This blog addresses one of the best financial tools for wealth creation: the ULIP. It also discusses the differences between ULIPs and mutual funds, and why ULIP is better in some cases.
Understanding ULIPs: Why ULIP is better than a mutual fund
A ULIP or Unit Linked Insurance Plan is an insurance plan which carries an added advantage of giving you market-linked returns. The premium paid on a ULIP is divided into two portions; one that is allocated towards risk cover and the other that is invested in various types of funds like debt, equity, money market instruments, financial instruments etc. This part of the ULIP is similar to a mutual fund with there being a difference in the fund management charges (FMC) levied and the tax rebates.
Like a mutual fund, where fund managers invest your money in different sectors, even in ULIPs, there are fund managers who invest your money in different sectors and instruments.
The differences between ULIPs and mutual funds: Which one is better for you
A lot of people get turned off when faced with the prospect of investing in ULIPs as they feel that Mutual Funds give them better returns in the short and medium-term. While this may be true, it is also true that ULIPs can hold their own in the long-run over mutual funds.
1) Firstly, ULIP’s give insurance cover which means that in the event of death of the Life Assured, the nominees are entitled to fund value of the Sum Assured, whichever is higher. This ensures peace of mind for the individual as he knows that his family is covered and secure.
2) Secondly, switching between funds is permitted in a ULIP which can be a decent advantage in falling markets. With this facility, you can maximise your fund allocation even when markets are not doing good.
3) Third, investing in Insurance products offer you tax deductions under section 80C which is not available widely in mutual funds.
4) Fourth, because of the fund management charges (FMC) associated with early withdrawals in a ULIP, an individual is incentivised to stay invested for the long term which is bound to give better returns as compared to the short term gambles that he may otherwise take in the stock market.
5) Lastly, the returns that you receive from a ULIP is tax free – the returns are entirely tax deductible.
However, ULIP’s are badly sold as pure tax-free investment policies. Agents wrongly sell it to their gullible clients in tax season by saying that they can withdraw the amount after remaining invested for 3 years. This is a misconception since in the first three years, the charges are maximum and the returns are minimum. In ULIPs, the overall charge structure comes down significantly over the long-term, allowing better and bigger allocation of premium to your chosen fund, thus assisting in wealth creation. Therefore, it’s important that one stays invested in a ULIP for 10-15 years or even longer, as the scope of the instrument is better realised over this time frame. The longer one stays invested in ULIPs ,the better would be the return on investment.