Introduction
The returns from an investment decision are largely dependent upon the time frame of investment. Often, the financial impact of an investment can span across one’s entire lifetime. Hence, it becomes critical for one to have well defined financial goals. There are several other factors like risk profile, returns expected, fees and liquidity considerations while choosing a financial product. There is a high probability you must have heard the popular marketing line ‘Mutual Funds Sahi Hai’. But when compared to some of the features of ULIPs, like insurance and risk, MFs are a Nahi.
We shall consider two financial instruments: ULIPs and MFs and compare both.
Meaning of ULIP
ULIP stands for Unit Linked Insurance Plan, i.e. an investment option which provides market-linked wealth creation along with life cover, by paying premiums till maturity. Besides, ULIP is also subject to tax benefits.
Meaning of Mutual Funds
A mutual fund is a professionally managed investment fund that pools money from several investors [retail and institutional] to buy tradeable securities.
Comparison of the features of ULIP vs Mutual Funds
- Insurance – The single biggest ULIP benefit is that unlike mutual funds, ULIPs offer a life cover. This is the money the insurance company promises to pay the policyholder’s family in case of an untimely death of the insured.
- Risk-return trade-off – There is a fundamental rule of finance i.e. high risk, high return. Since ULIPs are primarily insurance products, the risk is low, and the returns are limited and assured. On the other hand, mutual funds are of various types i.e. equity, hybrid and debt with subsequently reducing risk profile and declining returns, in that order.
- Fees – Owing to a large number of investors pooling their funds, the management fees in mutual funds is relatively lower than ULIPs.
- Liquidity concerns – Mutual funds are widely traded in the secondary markets and are more liquid compared to ULIPs.
Should I take a look at ULIPs?
A financially prudent investor definitely should. ULIP is a dual advantage product with in-built insurance and investment features.
Consider an example. Mr. A invests 50,000 in a ULIP, while Mr B buys mutual fund units with the same amount. All of this money is invested for both Mr A and Mr B. However, every month, a part of Mr. A’s investment is taken as insurance cover, which acts as the ‘protection for insurance premium’. This buys him an insurance cover of Rs 5 lakh. In Mr B’s case, he would need to buy an insurance policy separately to get a life cover. In case Mr. A meets with an accident and passes away, the insurance company would compensate his family with Rs 5 lakh or the fund value, whichever is higher. Mr B, however, will not receive the same benefits.
Conclusion
After looking into the pros and cons of investing in ULIPs and mutual funds, it can be concluded that there is no ‘one size fits all’. A prudent investor must consider diversification of his investment portfolio to leverage upon the insurance advantage of ULIP and the high return potential of mutual funds. You might ask “So why should I invest in ULIP?” To combine the insurance and investment benefits under one comprehensive plan, invest in a ULIP today.