Marketers innovatively use ‘Combo Offers’ to sell products. For example, when you buy a mobile phone, the seller provides an ‘Extended Warranty’ or ‘One-time Screen Replacement’ at a discounted price.
Such product combinations are a win-win situation that benefits both the buyer and the seller.
What does this have to do with mutual funds or ULIPs?
Mutual Funds offer pure investment options. Thus, depending on the investment objective of the mutual fund, it will invest your money across different asset classes.
Unit Linked Insurance Plans, better known as ULIPs, are a product offering from insurance companies that provide a ‘Combo’ of investment and insurance. The underlying investment funds offered by ULIPs are similar to that of mutual funds.
You may not always opt for combo offers. Whether or not to buy an investment product depends on one’s need.
Similarly, when choosing between mutual funds and ULIPs you need to keep in mind your financial needs.
Before discussing the differences between Mutual Funds and ULIPs, let’s take a quick look at how these products work.
How do mutual funds work?
A mutual fund scheme garners money from you and other investors and allows units in return. The fund manager then allocates the money pooled by the mutual fund over a set of stocks or bonds that form the portfolio of the fund. The fund manager decides the portfolio allocation.
The price of each mutual fund unit is known as the Net Asset Value (NAV), which is derived from the value of the underlying securities. Investors can buy and sell mutual funds at the applicable NAV.
How do ULIPs work?
As mentioned earlier, ULIPs are a combination of investments and insurance. Every ULIP policy has a minimum premium amount and a premium payment term. The sum assured is a multiple of the premium amount. You may choose to make a Single Payment or Regular Payment over the policy term. The policy term ranges from a minimum period of 5 years to as much as 20 years.
Every premium you pay, part of it is deducted towards the insurance cover, which is the mortality cost. Apart from this, other charges in the form of Administration Charges and Premium Allocation Charges are deducted. The resultant premium is then invested in the funds selected.
Every ULIP has a list of underlying funds that have a predefined investment strategy. You may invest in a single fund or divide your investment across multiple funds based on your risk profile.
Insurance Funds are similar to mutual funds, but you can invest in them only through a ULIP.
Mutual Funds Vs ULIPs
Clearly, mutual funds are the best investment option for investors. The choices are many and you get access to different investment strategies. Even if you choose a fund or fund house that does not perform as expected, you can easily redeem your investments and invest elsewhere. However, in ULIPs the process is not easy and is riddled with costs.
ULIPs can be looked at as an alternative to term insurance, where the period of coverage is over 10 years or more. Though the premium will be higher for the same level of coverage, part of it is invested in ULIP funds that can generate reasonable returns over the policy period. You will also gain tax benefits for your investment.
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