More than the act of investment itself, it is all about grabbing the right opportunity to make the wealth grow, incrementally, by zeroing in on the right financial instrument. While there can be several options to rely on, ULIPs and Mutual Funds come across as some of the quickest and most reliable strategies to work on the existing corpus and make it generate higher returns by the year.
But then, it is necessary to fully understand the differences between a ULIP and a mutual fund and eventually select the right one as per your passive income generating requirements.
What is a Mutual Fund?
Mutual funds are relatively aggressive financial instruments that concern pooling funds into a wide range of debt and equity instruments. Most importantly, these market-linked funds are handled by fund managers that have prior experience in making financial decisions, based on the duration of investment, the risk appetite of the individual, and even the market conditions.
Successful mutual funds are the ones that have several investors lined up to put money in a select corpus that is then regarded as a comprehensive financial pool that is deployed to generate returns.
How does a ULIP Work?
As a financial product, certain aspects of a ULIP are similar to that of mutual funds, including investment opportunities concerning debt instruments, equity shares, and bonds. However, a ‘Unit-Linked Insurance Plan’ also brings in an element of insurance cover, making it a more comprehensive form of investment.
Ulip vs. Mutual Fund
- ROI
The first aspect that concerns ULIP vs. Mutual fund, is the scope of returns. A ULIP promises fixed returns, regardless of your investment’s fate. However, mutual funds generally offer higher returns, both for debt-linked and equity-linked investment plans.
- Lock-Ins
As ULIP essentially comes forth as an instrument-backed product, which means that the lock-in period for the same is the prerogative of the concerned insurance company. To simplify, most ULIPs have lock-in periods ranging from three to even 5 years at times. In the case of a mutual fund, the lock-in period can be as low as one year.
- Transparency
Mutual funds are quite transparent when it comes to declaring the overhead fee and portfolio-specific holdings. ULIPs, owing to their complex structure, are more difficult to understand when asset allocation and underlying expenses are concerned.
- Tax-based Benefits
ULIPs allow you to procure tax deductions for up to Rs. 1.5 Lakhs as per Section 80C. However, most mutual fund investments, barring the ELSS, cannot be used to procure tax-specific benefits.
In addition to the following dissimilarities, ULIPs and Mutual Fund also differ when it comes to the risk cover and overall expense ratio. Not to mention the fact that ULIPs are the best selections if you are looking for something in the investment horizon whilst saving on taxes and getting a live cover in the process. Mutual funds offer high liquidity while catering to your medium or even high-risk preferences.
Final Words
While both ULIPs and Mutual Funds should have their place in your portfolio, you can always head over to the Finserv MARKETS for finding the best option and investment instrument, as per your financial preferences.
