The investor is the only one who decides whether to invest in mutual funds or ULIPs. An investor should assess their financial needs before investing in any product. The best investment choice is one that is consistent with the investor’s financial objectives, risk tolerance, and investment horizon.
For instance, investing in mutual funds is a possibility if assets need to remain liquid because ULIPs have a minimum lock-in duration of five years. Naturally, not all mutual funds are liquid, and tax-saving mutual funds (ELSS funds) have a 3-year lock-in period. The alternative is to think about investing in ULIPs if you’re searching for both insurance and wealth building. To know more about the difference between ULIPs & Mutual Funds, read on.
What Do We Mean By ULIPs?
An insurance and investment product is known as a ULIP. ULIPs are insurance plans that give a buyer the security of a life insurance policy while also giving them the chance to build wealth.
In ULIPs, a portion of the premium is used to purchase life insurance for the investor. The remaining funds are combined and placed in long-term wealth-building debt, equity, or a combination of both products.
What Do We Mean By A Mutual Fund?
An asset management company (AMC) handles the money of several investors through a financial instrument known as a mutual fund. The proceeds are then invested in further securities, including bonds, equities, and money market instruments, among others. Your mutual fund scheme’s success is closely correlated with the performance of these underlying securities.
Mutual funds are collections of investments that are overseen by experts called fund managers. It is comparable to getting on a bus, when the driver drives everyone to a specific location. In this case, the bus is a mutual fund programme, the driver is the fund manager, and the passengers are the investors. Fund managers are professionals in mutual funds who decide on the proper asset allocation based on their extensive understanding of the financial markets’ intricacies and volatility.
What Are The Differences Between ULIPs And Mutual Funds?
Following are the differences between ULIPs And Mutual Funds –
- Purpose Of Investment – A mutual fund is a pure investment instrument with the only purpose of generating wealth that has the potential to produce respectable returns over time. However, ULIPs have the benefit of being a market-linked investment in addition to being primarily an insurance product.
- Investment Returns – Due to their investments in debt, equity, or a combination of the two, ULIP returns might fluctuate. The returns on mutual funds can be modest to high depending on the sort of plan chosen, and they vary as well. Mutual funds do not guarantee minimum returns.
- Lock-In Period – Due to the fact that ULIPs are considered insurance products, insurers set a lock-in term of typically five years for these investments. Prior to the expiration of this lock-in period, investors cannot redeem their assets. However, with the exception of ELSS funds, which have a 3 year lock-in time, the majority of mutual funds, notably open-ended mutual funds, do not have a lock-in period.
- Transparency – ULIPs are now quite open thanks to recent regulatory changes introduced by the IRDAI; they now give up-front information on money allocation. Fund houses are required to produce a thorough report on the mutual fund investments in the case of mutual funds. Fund houses are recommended to give comprehensive information on asset allocation, portfolio holdings, active fund manager(s), fees charged, etc., with regard to various schemes by financial markets regulator SEBI.
- Expenses – An expense ratio, also known as a professional management charge and operational cost, is incurred while investing in mutual funds. Some mutual funds further impose an exit load, or fee for quitting the programme. The fees assessed for ULIPs include premium allocation fees, fund management fees, administrative fees, mortality fees, etc.
- Coverage – In ULIPs, nominees are paid the insured amount in the event of the policyholder’s untimely death. The investments are given to the nominee in the case of mutual funds, though.
Endnotes
In a nutshell, the main objective of mutual funds is wealth growth, whereas the main objective of ULIPs is to provide life insurance for the investor.