At the end of every financial year, we often hear people talking about tax ...
Mutual Funds (MF) and Unit Linked Insurance Plans (ULIP) are two popular investment options available for investors. Distinctly different yet very similar in their functioning and structure, they offer investors an exposure to a market linked portfolio giving an opportunity to earn positive returns. So what sets them apart and what is similar? Here’s a quick look into both the options.
What is Similar
1) Exposure to the capital market
MF as well as ULIP exposes investors to the capital market. So even if you do not have the expertise to invest in the market, with the various funds offered, you get an opportunity to invest across different asset classes of debt, equity or a balance of the two.
2) Option of Systematic Investing
Investments in ULIP as well as in MF could be done with a onetime lump sum payment or systematically at periodic intervals. A systematic investment takes advantage of market volatilities yielding positive returns.
3) Risks involved
The returns generated from a MF as well as a ULIP greatly depend on the performance of the underlying scheme that has been invested in. So whether it is a debt funds for the risk averse or equity for those who can bear some risk, both the options are definitely fraught with risk.
4) Net Asset Value
In both the investments, units are allocated to you on the basis of a Net Asset Value (NAV). The NAV of a MF or ULIP is the market value of each unit of the scheme. Calculated on a daily basis, it is the total of the assets, securities, cash and any accrued earnings (after deducting liabilities), and dividing the remainder by the number of units outstanding. It is commonly used as a measure to understand the profits that have been generated from the investment.
What Sets Them Apart
1) Nature of products
Mutual funds are a sole investment product. The primary aim of a MF is wealth creation. Equity, debt or hybrid, it offers different investment options to suit various risk profiles. On the other hand ULIP is a product bundled with life cover, wealth creation as well as tax saving. Mutual funds too have a tax saving option, but that is only applicable and limited to Equity Linked Savings Schemes.
2) Degree of risk in investment
ULIPs are primarily insurance products. Fund managers of ULIP therefore are careful and use less aggressive investment strategies. This makes ULIP less risky than mutual funds. Mutual funds being pure investments products have their portfolios exposed to much more risks to be able to generate superior returns.
ULIP typically have a lock-in period of 3-5 years during which time units cannot be sold. Mutual funds generally do not have a lock-in period (except in the case of closed ended funds which have a lock-in period of 3 years) and are more liquid than ULIP, as they can also be widely traded in the market.
4) Different Regulatory
Mutual funds and Unit Linked Plans are regulated and governed by two distinctly different bodies. Where mutual funds fall under the purview of SEBI, ULIPs are governed by the IRDA.
Expenses incurred in a MF are much lower than ULIP expenses. There are three types of mutual fund charges- Entry load, Exit Load and recurring charges. Entry and exit load are onetime expenses varying between 1 to 3%. Recurring charges are towards, fund management, cost of sales & marketing and administration, and is around 2.5%. In the case of ULIP, the upfront charges are much higher. Most of the charges are collected in the initial 3 to 5 years.
Which one to invest in
Before deciding on which one to invest in, it is vital to ask yourself the following questions.
- What is the purpose of your investment? Are you looking at only wealth creation for financial goals, for retirement plans or do you also seek protection?
- What is your investment horizon?
ULIPs are best suited for individuals with a long term financial plan of wealth creation and insurance. Whether it is for retirement, children’s education or for other financial goals, a ULIP continued till maturity works as an advantage. It gives you the dual benefit of savings and protection, all in a single plan.