Unit Linked Insurance Plans Versus Mutual Funds: An Analysis
Unit Linked Insurance Plan is a special type of an insurance plan which provides the dual benefit of a risk cover as well as wealth creation
. The performance of these insurance plans is linked to equity or debt markets. In a ULIP investment, a part of the premium paid by the policyholder is towards the life cover, whereas the other part is invested in equity or debt instruments, to generate a higher return on investment.ULIP mainly works on the principle of rupee cost averaging and aims to safeguard your investment from short term market fluctuation. Like in mutual funds, for ULIP plans, a daily net asset value (NAV) is declared which determines the performance of the ULIP. These plans are flexible and have a wide array of options to switch between different asset classes. Hence, an investor can decide a policy where the equity exposure is more than debt during favorable market conditions and vice versa.
The main advantage of a ULIP is that it qualifies for tax exemption under Sec. 80 C of the Income Tax Act, 1961. Also, the flexibility that one enjoys to choose the term, insurance cover and get the benefit of earning a higher return, if the policy performs well is an added advantage. A range of online ULIP plans are being offered by insurance companies, details of which are freely available on respective companies website.
Now, an obvious question that can rise in ones mind is that, what is the difference between Mutual Funds and ULIPs? Read to learn more on Unit Linked Insurance Plan.
Mutual Funds are completely investment oriented whereas ULIPs are focused on investment as well as insurance
ULIP plans are generally, better suited for long term investments whereas mutual funds are generally, better suited for relatively short term investments
ULIPs are regulated by IRDA whereas mutual funds are regulated by SEBI
All ULIPs are tax exempt whereas in mutual funds, only ELSS schemes are tax-exempt under Sec. 80 C of the Income Tax Act, 1961
Hence, as an investor it is very important, that you understand what is the motive of your investment keeping the above mentioned points under consideration. If you are a young adult who wants to buy an insurance cover, but also have the risk appetite to earn a higher return, then ULIP is an investment product best suited for your needs. But if you are looking at an investment for a short term of two to three years, then mutual fund investment may be better suited for you.
So once you do this analysis, you are set to take the plunge and earn attractive returns on your investment!
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