Confused between ULIPs vs Mutual Fund? A Quick Guide

ULIPs

Mutual Fund

There is definitely a risk involved in investing in ULIPs. ULIPs face the risk of defaults and changes in the rates of interest.

The risk involved in investing in this financial product is higher as the equity investment is dependent on market fluctuations and a fund manager’s decision.

An investor with the ULIP is awarded shares on the net asset value basis and the individual investor has the liberty to invest the money in any financial product of his choice.

While investors in mutual funds definitely have shares with them, the discretion to invest in a financial product solely lies with the fund manager.

ULIPs

Mutual Fund

A ULIP is a two way investment into insurance as well as core investment product of an investor’s choice.

A mutual fund is a core investment product.

A ULIP is a carefully planned out financial investment with the help of a financial advisor who determines the monthly premium on the basis of the investor’s income and expenses for a specific time period.

A mutual fund investment can begin with as basic as an amount of 500 Rs per month for a minimum period of 12 months as a systematic investment plan (SIP).

The exit from the ULIP plan before its maturity requires the investor to bear the financial implication.

There are no penalty implications to be borne by the investor in case of the discontinuation of the SIP.

The expenses for ULIP are high as the Insurance Regulatory and Development Authority (IRDA)prescribe limits only in certain cases, thus an insurance company has an upper hand in determining the investor’s expenses. The high premium allocation charge is ruled to be not exceeding 10% of premium. With this are the additional charges of mortality, fund management charges, policy administration charges among others.

Expenses though seem to be lower for the mutual funds with the Securities and Exchange Board of India (SEBI) setting the upper limits for expenses, expenses charged by mutual funds to investors for a range of activities like fund management, sales and marketing, administration are subject to certain limits. Charges over and above the specified limit if any are borne by the fund house instead of investors.

ULIPs have an investment period determined, with a minimum of 5 years locked in from the very onset of the first transaction.

Mutual funds have the ease of being changed into liquid asset conveniently as they are traded in the market on a regular basis. However, all mutual funds are not liquid in nature with ELSS being the most apt example.

ULIPs are also expected to submit their quarterly reports before the investors.

Investors of the mutual funds, according to the SEBI guidelines need to quarterly updated on the numbers of their portfolio. However, a monthly practice is followed by industry to ensure a transparency between the fund manager and its investors.

ULIPs allow the investor to choose the sum that he wants to be invested in equities and in insurance cover. Investors are also given the option of entry and exit from a mutual fund whenever they want.

The decision of entry and the exit point of the investment relies with the fund manager with no flexibility to change the asset allocation midway.

ULIPs allow the investor tax relief up to a limit specified under the Section 80 C of income tax with the proceeds also remaining tax free in the hands of the investor.