Difference Between MF and ULIP? Which is Better?

Difference Between MF and ULIP? Which is Better?

Difference Between MF and ULIP. Which is Better?

Unit Linked Investment Plans (ULIP) and mutual funds (MF) are both investment instruments linked to markets, which means that the returns from the two are subject to the performance of the financial markets. The stock market link factor can often lead to a confusion between the two instruments as both allow the investor to choose their fund variety based on their risk appetite, however, they have major differences.

Fundamental differences between MF and ULIP

 The major difference between a MF and a ULIP is the insurance factor. ULIPs are hybrid products that combine investment with term insurance coverage. It means that you can invest in debt or equity or both based on your risk taking capacity and you will receive term insurance cover along with the investment growth. MFs do not have any insurance component and are meant purely for investment purpose. They come with a wide range of fund combinations for all kind of investors. ULIPs are regulated by India's insurance board IRDA while Mfs come under the securities market regulator SEBI's purview.

Initial load

ULIPs have larger entry loads of 5 to 40 percent of your contribution (can vary) that is debited to your NAV (net asset value) in the initial years as upfront costs. While this will gradually reduce in the following years, the cost makes mutual funds a more attractive bargain as an investment as they use Total Expense Ratio (TER) for costs. The TER can be non-existent or as much as 2.5 percent.

Flexibility

ULIPs have a minimum lock-in period of 5 years, whereas mutual funds are highly liquid except for ELSS. Additionally, if you want to switch funds, in a ULIP you will be limited to the options provided by your policy provider. On the other hand, mutual funds come in a large variety and combinations. At the same time, ULIP allows you to switch between funds (liquid to equity fund) for example by paying a switching fee, while you cannot do that in mutual funds as portfolios are managed by professional fund managers. MFs allow you to stay invested in a scheme even after maturity whereas this facility isn't available in ULIPs.

Tax Benefits

ULIP funds are eligible for tax exemption under section 80C due to their insurance element, whereas in MFs, you can expect it only on an ELSS. You should also consider the fact that ULIPs have a lock-in period of 5-years while ELSS is just 3 years. Another factor that speaks in favour of ULIPs is that they are exempted from the 10 percent flat tax that is being imposed on Long-term Capital Gains (LTCG) in the Union Budget 2018.

Transparency, Risk and Returns

Mutual funds are more transparent than ULIPs. Despite being regulated, ULIPs are fairly new compared to mutual funds and the fund allocation made towards life cover and investment is not entirely clear. Additionally, ULIPs have no legal requirement to send quarterly portfolio disclosures (regarding NAV returns, analytics, etc) like MFs. In terms of risk, ULIPs are safer compared to MFs (guarantee assured sum on death irrespective of fund allocation) and for the same reason the potential returns will be lower.

Which is better for you?

Any investment decision depends on a person's risk appetite and financial goals. The same goes for choosing between MFs and ULIPs. That being said, an insurance cover for your dependents and investments for growing your money are both important as well as separate needs at the same time. This is why most experts advice against mixing the two. It is better to invest in a simple term insurance separately to cover risks and pick a sound mutual fund investment plan (SIP) for long-term goals.