After LTCG Tax: Are ULIPS better than Mutual Funds?

On February 1st, Arun Jaitley proposed the implementation of the LTCG (Long-term capital gains) tax from 1st April 2018. Under the LTCG tax, investors shall have to pay 10% tax on the profits they make on their equity or equity mutual fund holdings. This would mean that you have to bear the weight of an added tax burden, and out of the profit you make, you will only receive 90% of the total amount. The introduction of this tax has made investors lose interest in investment options which are directly connected to the equity markets. They are switching from investment products like ELSS or Mutual funds as the LTCG tax has made them less attractive.

After the switch from ELSS and Mutual funds, a new investment avenue emerges for you: Unit Linked Insurance Plans. Being an insurance product, ULIP is the only remaining investment tool which hasn’t been crushed under the powerful hammer of the LTCG tax.

Why ULIP?

While Mutual Funds were a great option to invest and earn good returns, they have lost their profit earning potential with additional 10% tax burden. ULIPs, on the other hand, are market-linked investment products like mutual funds but preferred due to their tax saving potential and dual benefits.

1. Death Cover: When you invest in a ULIP, unlike any other financial product, you are provided with a death benefit in case you die prematurely. By paying a regular premium amount, you are entitled to a lump sum payable by the insurance policy after your death to your next of kin. ULIPs are the only products available which are linked to the market and still provide a death benefit to the policyholders.
2. Return on investments: ULIPs go beyond just being an insurance product. A part of your premium is invested in the financial. You can choose funds of your choice, and switch between funds based on your goals and market conditions.

ULIPs let you earn a hefty tax-free return from market funds as a portion of your premium is invested in funds of your choice, and the rest goes towards the life cover provided to you as the sum assured, in case of death or maturity of the term. When you buy a ULIP, you get protection against any future eventuality, and you can also build your wealth by earning a return on your investments, without having to worry about paying an additional tax on your profits.

Mutual Funds vs ULIP

There has always been a debate among investors whether Mutual Funds are a better investment option than ULIPs. When the new age low-cost ULIPs were introduced in 2010, ULIPs took a giant leap towards reaching the rank Mutual Funds have established in investors’ mind, but the introduction of the LTCG tax became the ultimate reason to finish the debate after so many years, and ULIPs stand out as the clear winner. To understand this from an economic perspective, look at the following chart:

While Mutual Funds started strong, ULIPs took the field from the 10th year on. They have proved to be cost-effective and currently dominate the area of investment options to achieve your long-term financial goals. With lesser total amount invested, ULIPs have and are providing better returns than any other financial product. And to top it all, they still provide the ever famous ‘ULIP tax benefit’, from which you can save tax under section 80C and 10(10D) of the Income Tax Act, 1961.

The Next Step

The next step for you or any other investor would be to switch from Mutual Funds to ULIPs. If you are still to invest, invest in a ULIP online. It will allow you to save more and avoid an added tax burden. While Mutual Funds had a good run, they have now become a thing of the past.

Edelweiss Tokio Life gives you tailor-made plans wealth plus which cater to your every need. You can achieve your long-term goals efficiently and can also save tax under section 80C and 10(10D) of Income Tax Act.