Is ULIP better than Mutual Funds?

Mutual Funds

When we talk about investing our money in the market, we think of many things: real estate, bonds, shares, mutual funds, term insurance, insurance policies with cash accumulation provisions, etc. How do we decide between two options of two different kinds?

We start by understanding the fundamental functions and differences between those two. In this case, we are talking about ULIP and mutual funds. So, let us understand the features of these two so that you will have to understand the difference between ULIP and mutual funds.

Understanding ULIP

Unit Linked Insurance Plan, or ULIP, is a type of financial tool that is an amalgamation of insurance and investment. In this case, the premium paid by the policyholders will be divided into two parts.

The first one goes to your life insurance coverage, and the second goes to investments in debt, equity funds, etc. This fulfils the functions of life insurance, securing your family along with the functions of investment by providing a return on investment.

Understanding Mutual Funds

Mutual funds are a well-known type of investment where the investor puts their money in this instrument, which is then invested in different types of shares, equity, debt, or other return-yielding securities. This type of investment demands strategic planning by the investor.

Advantages of ULIP and Mutual Funds:

ULIP Mutual Fund
ULIP provides the benefits of insurance as well as investments, giving us the best of both worlds. Mutual funds have trained professionals to manage your funds, mitigate risk, and handle your investment portfolio.
ULIP offers switching between funds, but that is not the case with mutual funds. Mutual funds allocate your funds to diverse types of investments, high-risk and low-risk, which allows portfolio diversification.
After the lock-in period, ULIP allows you to withdraw a certain amount from your account. Mutual funds allow you to withdraw at your convenience as well as to liquify your funds.
Due to its dual qualities, ULIP pays out the sum assured after the investor’s demise. You can invest in various mutual funds simultaneously.
Periodic top-ups are possible with ULIP. Unlike ULIP, mutual funds are simplified in nature, to buy and to understand as well.


Disadvantages of ULIP and Mutual funds:

ULIP Mutual Funds
ULIP can be difficult to understand for a person who doesn’t know much about or doesn’t have expertise in finances. You lack or have no control over the capital gains.
ULIP relies on the market rates and ups and downs and hence can be a risky investment compared to mutual funds. Mutual funds have a higher expense ratio, while sales charges are also expensive.


Which One is Better: ULIP or Mutual Funds

The major differences between mutual funds and ULIP are their features. Let’s see what those differences are!

Feature ULIP Mutual Funds
Type ULIP is a type of insurance that offers you the benefits of investments and life insurance, both alike. Mutual funds are a type of investment where the investor allows the fund manager to invest their money in different financial investment tools.
Period ULIP is a long-term investment Mutual Funds range from short to medium period.
ROI ULIP provides you returns according to the market rate and, hence, might experience fluctuations from time to time. However, they also offer insurance coverage that mutual funds lack. Mutual funds have a reputation for providing higher returns than other forms of investments.
Lock-in period Since ULIP is a long-term investment, the lock-in period is high as well which ranges from 3 years to 5 years. Mutual funds have a lock-in period of 1 year to 3 years.
Transparency You might feel the lack of transparency due to the complexity, but you can definitely track your fund allocation online as well. Mutual funds are very transparent in nature.

What is better?

As mentioned above, it is up to you to choose the best option for you. Since you have your financial goals clear, you would want to align your expectations with the benefits provided by each.

Comparing your risk appetite and hopes for returns, you can choose which one you can afford! While mutual funds offer purely market-linked returns, ULIPs have an upper hand since they provide the advantages of insurance as well as investment.

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