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Differences Between Mutual Funds and ULIPs – 2024

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Differences between Mutual Funds and ULIPs

Unit Linked Insurance Plans (ULIPs) and mutual funds stand out as two potential options that catch your attention whether you’re seeking financial growth or considering investing in other assets.

In addition, both of them will help you long-term wealth accumulation and offer tax benefits. Both have advantages and cons depending on the financial necessity. To learn more about the differences between ULIPs and mutual funds, read this article.

What are mutual funds?

Mutual funds are one of the modern investing options that are most often employed. They act as a trust in which funds from institutional and private investors with comparable objectives are pooled to invest in a variety of debt and equity securities.

Mutual fund managers supervise them and make investment decisions on the investors’ behalf. There are many distinct types of mutual funds, and they are separated from one another based on a variety of criteria, such as the kind of market, the term, and the risk component.

What are ULIPs?

One of the newest financial instruments made accessible to investors is ULIPs. The insurance plans known as unit-linked insurance plans (ULIPs) provide investors with insurance coverage while also generating income from investments made in a range of different sectors.

The insurance company announced a new plan and welcomed investors, much like mutual funds do. Through  ULIPs anyone can purchase bonds, financial products, and equity assets.

Key Differences Between ULIPs Vs Mutual Funds

● Risk Cover

One of the key distinctions between mutual funds and ULIPs is that mutual funds are purely investment products that have the potential to provide income over the short- to medium-term. However, with ULIPs, you receive investment rewards for a long-term investment in addition to life insurance coverage.

● Security

No security is guaranteed in both mutual funds and ULIPs.

● Tax Benefits

ULIPs are regarded as being accessible under Section 80C and are advantageous since the premiums are tax-deductible up to Rs. 1.5 lakh annually. Yet, because they fall under ELSS under Section 80C, mutual funds never assist you in reducing your taxes.

● Return on Investment

Mutual funds and ULIPs are both low-risk investments, although ULIPs with life insurance coverage may only offer modest returns or may vary depending on factors like debt, equity, etc. Mutual funds based on multiple plans, meantime, can provide greater return. The best hdfc sip mutual funds are a good choice if all you want to do is invest short- or mid-term and desire attractive returns.

● Lock-in Period

Due to the fact that ULIPs include life insurance, insurance firms set a lock-in term for ULIPs that can range from 3-5 years depending on the plan. The majority of mutual funds, on the other hand, do not have a lock-in period. Money invested in ELSS occasionally has a minimum lock-in duration of 3 years.

● Expenses

ULIPs are subject to premium allocation costs, fund management charges, administration charges and mortality expenses. On the contrary, Mutual funds must pay professional management and operating expenses. Also, Exit load fees are charged by some mutual funds.

● Flexibility

You may select how much of your ULIP investment goes toward investing and how much stays as life insurance. Mutual funds, meanwhile, give little flexibility.

● Loyalty Benefits

If policyholders invest in low-cost ULIPs for a longer duration, they will receive loyalty rewards. This offer simply asks policyholders to hold onto their money for a longer period of time. Mutual funds don’t offer any rewards for loyalty, though.

● Transparency

Since mutual funds made everything public before their shareholders, investors benefit from a great deal of transparency. Contrarily, while ULIPs provide risk management and portfolio allocation, their organizational structure is opaque. The hidden fees and other important information are not disclosed. Thus, ULIPs are more complicated to understand.

● Switching Options

For those whose investments are uncertain, this is one of the most crucial factors. As a result, they had to change their alternatives every time they invested their assets. In this situation, ULIPs are seen as advantageous since you may change them for free once a year or more frequently in accordance with their provisions. Mutual funds, meanwhile, always allow free switching as many times as you’d want. Check the difference before moving on to the conclusion so that you won’t have to start from scratch and can simply switch.

Bottom Line

With the aforementioned requirements, it is now evident what the genuine differences are. In addition, you could be wondering today if mutual funds or ULIPs are better. Therefore, the answer to this query is that it really depends on your needs. You can’t invest anywhere without deciding what you need and what you want to achieve.

If you want to enroll in a life insurance policy to protect your loved ones and also want to earn better long-term returns, ULIPs are the best choice.

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