Subah was confused lately. She had been looking for an investment product that could help her create wealth over the long term. However she could not make up her mind with the plethora of options available to her in the market. She had finally zeroed in on ULIPs and mutual funds as the two offered better returns as compared to others in the category. However, the final decision was yet to be made.
You should never invest in a hurry. While it is important to keep in mind the returns offered by the product, several other factors such as tax benefits, risk involved and flexibility are key points to be kept in mind while zeroing upon where to invest your hard-earned money.
Both ULIPs and mutual funds provide market-linked returns which are higher as compared to fixed income instruments. They help you build a corpus over the long term, however they are different in many ways.
Here’s a list of the advantage that ULIPs have to offer (whereas mutual funds don’t).
- Disciplined Investing
The five year lock-in period, one of the most distinguishing features of a ULIP, helps inculcate a habit of saving. It instills a discipline in investing your money and learning to manage your expenses in a budget. This is unlike mutual funds which have higher liquidity. You might be wary of investing when the market is going through a bad phase and cash out in an emergency, thus only aggravating your losses. ELSS funds have a lock-in period of three years, however, the money invested in the first year is only available to you in the fourth. The calculation of lock-in in a ULIP is from the date of issue of the policy.
- Good for First Time Investors
Those who have just begun investing, would not know much about mutual funds to make a move. Differentiating between seas of large cap, mid cap, small cap funds and choosing which one is right, could be a harrowing task. You might also end up making a loss if you do not choose wisely. However, one of the main benefits of ULIPs is that they give you a selected choice of funds as per your risk appetite to lessen confusion.
- Insurance Protection
One advantage of ULIP plans vs mutual funds is that they not only are a tool for investment but also an insurance product, thus offering you a dual advantage. Mutual funds are pure investment products. Whereas, ULIPs offer life cover along with the investment option - i.e. in the case of unfortunate demise of the life assured death benefit is paid to the nominees. In this case, your family members are financially secured in your absence.
- Tax Saving
One of the biggest benefits is that you save tax when you invest in them. You can claim the money that goes towards your ULIP premium every year as a deduction under Section 80C for a maximum of Rs. 1, 50,000 - subject to the prevailing tax laws. Not only this, the amount that you receive on the maturity of a ULIP is also exempted under Section 10(10D) of the Income Tax Act 1961 - subject to prevailing tax laws.
- Flexibility of Funds
Even a seasoned investor would need to decide whether a large cap, mid cap, or small cap fund is right as per his financial needs, investment horizon and risk appetite. This decision needs to be made wisely since once made, the consequences are for you to bear. Flexibility in fund choice and fund switch is one of the convenient features of a ULIP, especially for first time investors.
- Extra Protection: You can add critical illness or accidental benefit rider or both to give you additional cover apart from the life cover that a ULIP provides.
The facility of partial withdrawals for your financial needs as well as loyalty addition on maturity is where ULIPS provide an edge above other investments, especially when comparing ULIPs with mutual funds.
You get rewarded for a disciplined approach to investing and this amount when added to your fund value may only make you happier. ULIPs not only help you realize your long term goals but also ensure your dependents are protected throughout the term of the policy. .