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    ULIPS vs Mutual Funds: Confused where to invest?

    Synopsis

    ULIPs or Mutual Funds – All you must know before making the investment.

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    The financial year 2019-20 is already past the half-way mark. Very soon, your office HR will send reminders to submit your investment details from the year to ensure that the income tax deducted from your salary is accurate. Many of you must already be exploring different avenues to save some tax. If you have not already, you will soon figure that Unit Linked Insurance Plans (ULIPs) and Mutual Funds are among the most discussed and sought after tax-saving products in the market. The reason is the easy availability of these products with options to buy online, which not only save money but also time and effort. Past performance suggests that ULIPs have typically given a return of 12-15% for long-term investments. Returns from large-cap equity mutual funds have also given similar returns over a long term.

    However, there are other factors too associated with an investment and it might not be easy for everyone to decide which one to go for. If you are among those facing a dilemma on where to invest your hard-earned money, read on to understand how the two products compare on key parameters.

    What is on offer?
    A mutual fund is an investment instrument that provides you with an opportunity to invest in the broader capital markets. Let us consider an equity index mutual fund to understand this better. If you invest in an index mutual fund, you have a shareholding, via the fund house, in all the stocks that are part of the index at any given point in time. The growth of your wealth invested in a mutual fund thus depends on the performance of the stocks in the fund basket.

    On the other hand, in addition to allowing you to invest in a fund having an underlying basket of securities, a ULIP also allows you to have life insurance through the same product. In short, a ULIP is a dual-benefit product providing you with investment opportunity as well as insurance protection.

    Which has a better tax treatment?
    Tax incentives also play a big role in deciding where you invest your money. When it comes to ULIPs and Mutual funds, there are tax-related aspects that you must know before taking an investment call. To promote savings, the government provides certain tax benefits at the time of investment itself. Under Section 80C of the Income Tax Act, investments in ULIPs or tax-saving mutual funds are eligible for a deduction from your taxable income up to Rs 1.5 lakh. This could result in a saving of around Rs 46,000 for you. However, you must note that not all mutual funds qualify for this benefit. Only the ones classified ‘Equity Linked Savings Schemes’ are eligible. On the other hand, all ULIPs get the benefit under this provision.

    The tax treatment at the time of withdrawal or maturity is also something that you must keep in mind. For mutual funds, a long-term capital gains (LTCG) tax is applicable at the time of redemption. LTCG tax is currently at 10% for gains of over Rs 1 lakh. However, gains from ULIPs do not attract any LTCG tax. The amount you get at the maturity of ULIP is tax-exempt from taxes under Section 10(10D) of the Income Tax Act.

    When can you withdraw your money?
    An important aspect to consider while investing is the liquidity of the investment. This means when can the money invested by you be available if you need to withdraw it. Here too, mutual funds and ULIPs have significantly different rules. In case of regular (non-tax-saving) mutual funds, you can withdraw your investments any time without any restrictions, subject to some charges. For tax-saving mutual funds, you will have to wait for three years before you can withdraw your investments. For the withdrawal of investments from ULIPs, you need to be invested for 5 years. Even if you wish to discontinue your investments in a ULIP, say, in the third year of investment, your invested money will be available to you only after 5 years from the date of buying the policy.

    How much are you charged?
    For any service you take, the charges you pay for the service are also a noteworthy factor. As the nature of the two investment instruments in question here is very different, the charges too are very different. While a mutual fund only has an expense ratio, which covers the fund management charges and other administrative costs for the mutual funds, a ULIP has not just fund management charges, but also mortality charges and some other charges as well. Mortality charges are nothing but the amount you pay to avail of the additional insurance benefit in a ULIP. The fund management charges of a ULIP and expense ratio of a mutual fund are thus comparable. As per the current regulations, ULIPs cannot charge more than 1.35% of your assets in a fund in a year. It also needs to be noted that some companies return the mortality and fund management charges on maturity of your policy . For mutual funds, the current regulations allow a maximum expense ratio of 2.5%. Typically, the fund management charges or expense ratio is lower for debt funds and is relatively higher for equity funds. This is true for both mutual funds as well as ULIPs.

    Now that you are aware of how these two products stand against each other in terms of basic features, let us understand how you should decide which one to go for, and when. Keep in mind the following aspects before you invest in any of the two products.

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    What is your risk appetite?
    How much risk are you willing to take on your investments? This defines your risk appetite. Financial advisors usually recommend having a healthy mix of equity and debt. If you have a high-risk appetite, you can have a higher allocation to equity and lower allocation to debt instruments, and vice versa. Both mutual funds, as well as ULIPs, provide you with multiple options in terms of combinations of equity and debt. However, ULIPs also allow you to switch between different funds under the same plan if you are not satisfied with the performance of your fund. In fact, some companies allow you to switch between different funds unlimited number of times. To do the same in a mutual fund, you might have to exit a mutual fund and invest in another, which would attract exit load charges as well as short-term capital gains tax.

    What are your financial goals?
    You invest with a purpose. The amount you will realise after an investment period could be used to fulfil a specific financial goal. As detailed above, the lock-in periods of ULIPs and some mutual funds are different. Accordingly, you can use either of the two based on your financial goals. If the goal is a short to medium-term goal, you can choose tax-saving mutual funds which will allow you to withdraw your investments after 3 years. On the other hand, ULIPs can be used to target longer-term financial goals like children’s education or retirement.

    Do you need an insurance cover?
    While you might be working towards your personal and your family’s financial goals, the element of risk in case of an unfortunate event is always there. This is where a ULIP stands out, as it also provides you with protection in the form of life insurance cover. If you already have a sufficient life insurance cover, you can then choose mutual funds as your investment vehicle. On the other hand, if you are not yet insured, you could consider a ULIP. As a ULIP provides both investment and insurance under a single product, it can also be a good way out for individuals who do not want to manage multiple financial products. The insurance cover can also act as an added layer of financial security for your family in your absence. Your nominees or family members can use the insurance pay-out from a ULIP to pay existing liabilities or even fulfil their own financial goals.

    Your financial needs are likely to be very different than that of your friends who may suggest investment options to you. You must take into account your own risk, life stage, life goals, and responsibilities before making investment decisions.
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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    1 Comment on this Story

    Avnindra Baranwal29 days ago
    I did not read this article. But plz every one, kindly keep INSURANCE seperate from INVESTMENTS. Insurance as a Investment, never gives more than saving account returns :).
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