ULIP vs SIP - Difference, Benefits and Risks involved

All individuals have their own financial goals, and they tend to invest in different schemes to fulfil their goals. In India, the investment market is quite diverse. There are several instruments that you can choose from to build wealth over a period and secure your and your family’s financial future. However, often people find it challenging the right investment option, especially the first-time investors.One of the most common dilemmas people have is choosing between SIP ( Systematic Investment Plans ) and ULIPs ( Unit-linked Insurance Plans ). If you too are confused about what to choose, before you decide, it is paramount that you understand what these financial products are and know about the differences.

It is a known fact that mutual funds are one of the most popular investment options in India. Many retail investors choose mutual funds over other investment products for wealth accumulation as it gives a wide range of options. And SIP is one of the ways to invest in mutual funds of your choice.With SIP, you can invest a small amount periodically in any mutual fund of your choice. SIPs also give you the flexibility to choose the investment mode. You can make monthly, quarterly, or annual payments based on your income and convenience.

ULIP is primarily an insurance product that offers dual benefits of insurance protection and investment opportunity under a single plan. When you pay the premium for ULIP, the insurance company uses a part of the amount for insurance protection. The remaining part is invested in different money-market instruments like government bonds, stocks, equity funds, etc., to generate returns.Like the investments in mutual funds through SIPs, the investment aspect of ULIPs is managed by professional fund managers. And, when you buy purchase ULIP, you have the flexibility to choose the assets you want to invest in based on your financial goals and risk-taking capacity.If you can take high-risk, you can be aggressive in your investment approach and investment a significant part of the funds in stocks or equity funds. While there is a risk, this investment option has high rewards potential. Also, ULIPs come with a lock-in period of five years. This means you cannot withdraw the funds from your account for five years.Now that you know what SIPs and ULIPs are, it would help to understand the differences.

The difference between SIP and ULIP can be drawn on several factors that are discussed below.

• Benefits offered The ULIPs have a significant upper hand on this front as it offers both an investment opportunity and insurance protection to your family. If something happens to you during the policy period, the insurance company will pay the sum assured and the accrued benefits as a death benefit to your family.On the other hand, the SIPs don’t offer insurance protection. But they allow you to grow your funds better and have high returns potential. If you invest wisely, you can build a significant corpus in the long run.
• Risks involved ULIP is primarily a life insurance policy that also has an investment component. So, it gives you an inherent sense of security that your family’s future is protected no matter what. The investment component of ULIP has no bearing on the minimum sum assured amount your family receives upon your unfortunate demise.On the other hand, mutual funds are a pure investment product and the returns you generate greatly depend on the market performance. So, it probably has a high risk compared to ULIP.
• Lock-in period ULIPs come with a mandatory lock-in period of five years. This means you cannot withdraw the funds within the lock-in period.Most SIPs have a lock-in period of three years.
• Option to switch funds Another significant difference between ULIPs and SIPs is the ability to switch your investment between different funds.When you invest in ULIPs, the insurance companies give you a specific number of free fund switch options. This means depending on your changing financial goals, risk-taking capacity, you can switch your investments from debt funds to equity funds and vice-versa. The fund switch option is a handy feature that allows you to leverage the market performance and get better returns.The SIPs do not provide a fund switching option. And you are not allowed to switch investments throughout the investment duration.
• Tax benefits ULIPs enjoy EEE (exempt-exempt-exempt) tax status. This means you get tax benefit on the premiums you pay to the insurance company up to Rs. 1.5 lakhs in a financial year under Section 80C of the Indian Income Tax. Also, the amount you withdraw after the lock-in period is tax-exempt. Finally, the maturity proceeds you or your family receive is fully tax-free under Section 10(10D).The SIPs do not have any tax benefits, except if you invest in equity-linked mutual funds like ELSS (Equity-linked Savings Scheme). The investment in such schemes is eligible for tax deduction up to Rs. 1.5 lakhs under Section 80C.
• Charges levied The ULIP plans are subject to various charges like premium allocation charges, mortality fees, administration charges, etc. However, one of the most significant changes associated with ULIP is the fund management charges, which is capped at 1.35% by the IRDA.SIP investments too involve certain charges like fund management fees that are capped at 2.5%.So, when you invest in ULIP, or SIP, make sure that you read the offer documents carefully and be aware of the charges involved.

As an investor, you may have a fixed budget to invest in different schemes. Therefore, it is vital that you carefully choose the right investment option that suits your objective and promises valuable returns.ULIPs are an ideal investment option if you are looking for long-term wealth creation and want insurance coverage for your family. You can use the maturity proceeds from ULIP for long-term goals like retirement expenses, child education/marriage, etc.SIPs, on the other hand, are an ideal investment option for all. There are a variety of funds that allow you to accomplish both long-term and short-term goals. However, before you start investing in mutual funds, it is better to spend your time understanding how mutual funds work.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.