A good investment strategy can help you to increase your wealth and could secure your family’s financial future. ULIPs and mutual funds are both attractive investment tools for investors looking to create wealth in the long term.
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What is a mutual fund?
A mutual fund is a financial tool wherein an AMC (asset management company) manages the money of several investors. The collected funds are then invested in different securities such as bonds, stocks, money market instruments, etc. The performance of your mutual fund scheme is directly related to the performance of these underlying securities.
Mutual funds are pooled investments that are managed by professionals who are called fund managers. It is similar to boarding a bus, wherein the driver takes all the passengers to a particular destination. In this instance, the driver is the fund manager, the bus is the mutual fund scheme, and the passengers are the investors. Fund managers are mutual fund experts who have good knowledge about the complexities and volatilities of the financial markets and make proper asset allotment decisions.
What is a unit-linked insurance plan?
A ULIP, comprises of both investment and insurance. ULIPs are insurance policies that offer an investor the potential to create wealth while simultaneously providing them with the security of a life cover.
Under ULIPs, a part of the premium goes towards providing the investor with a life insurance cover. The rest is pooled and invested in debt or equity instruments or a combination of both to help create wealth in the long term.
ULIP vs. mutual fund
| ULIP | Mutual fund | |
| Purpose | To create wealth through investing as well as to avail a life insurance cover | To create wealth through investing |
| Regulatory body | Insurance Regulatory and Development Authority of India (IRDAI) | Securities and Exchange Board of India (SEBI) |
| policy term | Long-term | Short-term, medium-term, or long-term depending on one’s financial goals |
| Lock-in period | ULIPs have a lock-in period of 5 years | Most open-ended mutual funds do not have any lock-in period. A few exceptions are ELSS funds, children’s funds, retirement funds, etc. |
| Tax benefits | Premiums paid towards ULIPs are tax-exempt up to Rs. 1.5 lac under Section 80C of the Income Tax Act, 1961. Furthermore, the maturity amount is tax-free under Section 10(10D) of the Income Tax Act, 1961 | Equity-Linked Savings Scheme (ELSS) funds qualify for a tax deduction of up to Rs 1.5 lac under Section 80C of the IT Act, 1961 |
Conclusion
In a nutshell, the primary aim of ULIPs is to insure the investor’s life, while the primary goal of mutual funds is wealth creation. Choose wisely, and happy investing! The information given here is neither a complete disclosure of every material fact of the Income-tax Act 1961 nor does it constitute tax or legal advice. The ones who are investing are required to review the prospectus carefully and expert professional advice with regard to specific legal, tax, and financial implications of the investment/participation in the scheme