ULIP vs Mutual Fund: Feature Comparison

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There has been a debate on whether a unit-linked insurance plan is better than a mutual fund for decades. Now, after the LTCG tax, the insurance companies are highlighting that ULIPs are categorized under tax-free section.

However, the tax-free nature should not be the only factor that should be checked for indicating the conclusion in comparing ULIP and Mutual Fund.

There are various other parameters as well on which these should be compared and some of these are listed below:-

Transparency

When it comes to the evaluation of ULIP and Mutual Fund charges, mutual funds take away the brownie points. The ULIP charges are not as transparent as they should be because the premium allocation charges, fund switching charges, mortality charges, surrender charges, and other hidden charges are included.

According to the guidelines of SEBI, the organizations are bound to send periodical fact sheets along with NAV returns, portfolio mix, and analytics to the user. However, in the battle between Mutual Funds and ULIPs, ULIP is scored behind due to the lack of such insights and lack of transparency regarding costs and portfolio disclosure.

Returns

In order to find a conclusion to ULIP vs mutual fund, you should keep an eye on the returns that may benefit you in the short-term and long-term. There is an argument over the mortality charges because the amount must not be counted due to the provision of life coverage. Apart from the mortality charges, the NAV returns clearly make mutual fund the winner in the battle between ULIPs and mutual funds.

In an average large-cap mutual fund the value may grow around 18.83% but in a large-cap ULIP, the value can only be around 15.51%. The gap in value of mutual funds and ULIP can leave a huge impact in the long run and mutual funds are better in managing investments.

Henceforth, in the debate of ULIP vs Mutual Fund returns, mutual funds have gained more preference than the unit-linked insurance plans.

Hybrid Characteristics

Exploring every aspect of ULIP along with Mutual Fund, it is to be found that the ULIPs are an amalgamation of insurance and investment while offering choices. You can opt for equity or debt or choose a middle option where you are assured of the stability of debt and growth of equity.

Assessing the cost of ULIP and Mutual Fund growth, the mutual funds lack the insurance elements unlike ULIPs. Moreover, checking the ULIP vs Mutual Fund cost, you can notice that TER is levied proportionately periodically leaving an impact on the Net Asset Value.

Flexibility

The unit link insurance plan may be a good option for the policy buyers but the lack of flexibility is an issue according to the financial advisors. If you choose a large-cap fund without checking its underperformance, it is better to leave the ULIP. Understanding ULIP and Mutual Fund updates, cheap investments like exchange-traded funds and index funds are effective in limiting the loss.

Henceforth, fuelling the opinions regarding ULIP or Mutual Fund, many experts think that the separation between investment and insurance is a wise move. Moreover, many policymakers choose to start partial portfolio revelations complicating the comparison and categorization processes for funding in the same investment patterns.

Longer to Break-Even

The ULIPs take more time to make profits due to consuming more time to reach the break-even period.

Thus both ULIPS and Mutual Funds have their own advantages and disadvantages and the buyer should carefully assess both the options before investing in any of the above mentioned instruments.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.