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Mutual funds and ULIP are both attractive investment options for retail investors who desire to increase their wealth in the long run. The two most popular options have their own set of features, pros and cons, which an investor must consider before choosing.
Mutual funds vs ULIP, a tabular comparison
| Point of Comparison | Mutual Funds | ULIP |
| Product type | Mutual funds are purely investment products. | ULIPs are a blend of investment and insurance products. |
| Return on investment | The chances of higher returns are more. Some equity-oriented investment gives better returns. However, it does not give assured returns. | Returns are moderate to high. Net Asset Value depends on the kind of investment funds and market performance. However, it does not give assured returns. |
| Lock-in Period | Except ELSS, Mutual funds generally have a lock-in period of just one year. | ULIPs have a lock-in period ranging from 3 to 5 years. |
| Term | It can be short, medium or long-term. | Long-term only |
| Taxation Benefits | Mutual funds investment is liable for taxation as per the application tax bracket. The only exception is ELSS. | One can claim tax deductions up to Rs 1.50 lakh under Section 80C of the Income Tax Act. |
| Risk | Equity-oriented Mutual funds are very risky, while Bond-oriented ones are relatively less risky. | ULIPs have an in-built investment feature that provides the insured sum I case of death of the policyholder. Hence, they are relatively less risky. |
| Liquidity | Mutual funds are more liquid, except ELSS. | ULIP have lower liquidity and one needs to wait for the completion of the lock-in period. |
| Insurance and riders | Mutual funds do not provide any life insurance coverage. Therefore, they do not have any riders. | ULIP investors have an option to get comprehensive and complete protection by adding riders. It also comes with Life Insurance coverage. |
| Transparency | More transparent about the fees and portfolio handlings. | Less transparent due to asset allocation and hidden expenses. |
| Expenses | Mutual funds have low expenses due to management by professional fund managers. | ULIPs have higher charges, due to the complicated nature of its portfolio. |
Should you buy Mutual funds or ULIPs?
If you tend to be a short-term or medium-term investor who simultaneously wants higher liquidity and have a high or medium risk appetite, mutual funds are a recommended option.However, if you are a long-term investor who wants life insurance coverage and have a moderate risk appetite, then ULIPs are more suitable for you.
DISCLAIMER
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.