There is always a fine line of difference between investments in equity or bond market and in insurance products. General people whose main notion is to invest whether in equities or insurance is to save their money, save taxes and for financial security in future. So, choosing the right product is necessary for them as well as for big investors so that hard-earned money is not wasted and one can optimize the profits. Many investors who want to play it safe, invest in mutual funds or in ULIP. Here we are going to discuss the various aspects of these two investment vehicle and how they are different from one another.
Mutual Fund investments are one of the safest investment options if you are keen in investing into equities and bond. In amutual fund, investment and savings of various investors are pooled together to invest in securities like bonds, shares, money market instruments etc. It is safe because here you don’t bear the risk individually; the profits and the losses are proportioned amongst the investors of the fund.
There are two types of mutual fund investment –
- Open-Ended Funds: Mostly, the asset management companies issue open-ended fund. In this type of fund, investors can enter or exit the scheme at any point of time according to their need and suitability by buying or selling the units of the fund they hold.
- Close-Ended Fund: In this type of fund, the investor can only redeem their money or investment after the scheme period is over that is on maturity. Investors can trade this fund in thesecondary market as they are listed on stock exchanges as other securities.
NAV which is the net asset value of the fund is very important in this context and is calculated every day to understand the fund’s price movement and market value.
Unit linked insurance plans (ULIP) is a mix of investment and insurance which provides the edge for optimizing profit without much risk as insurance element is there. The investor or policyholder can pay the premium according to his preference of time- monthly or annually. A nominal part of the premium is kept for the insurance policy and the major part is invested.
There are different term scheme under ULIP- 5, 10, 15 years and one can invest in all of them. The money is invested in equities and debt or bond which is similar to the mutual fund investment. Investors who want to take therisk can choose the equity option and if they are risk averse, they can choose the debt option.
ULIP VS MUTUAL FUND
Comparison on the basis of –
- Costs: If you consider the charges then Mutual funds win the race as it has lower charges or premium. ULIP comparatively has higher charges.
- Returns: ULIP here also lose the game as the returns are lower as it is a low-risk investment vehicle compared to amutual fund. ULIP assure a fixed amount as areturn which is not dependent on the money made by the investment. On the other hand, mutual funds whether comprised of only equities or hybrid or only debt provides ahigher return than ULIP.
- Life insurance benefits: ULIP, as you know, has insurance element which is a life insurance coverage. ULIP policies in most of the cases provide life coverage amount equals to 10 times of the annual premium paid by the insured person. But mutual fund doesn’t provide any such facilities as there is no insurance element in it.
- Risk element: If you consider the risk ULIP wins the game as it is way less risky than a mutual fund. ULIP investments whether in equity or bonds are done with proper care to mitigate the risks. Mutual funds, on the other hand, have higher risk elements. The mutual fund comprised of debt is the less risky amongst the lot whereas the funds which are invested in equities are the riskiest of all type of mutual funds.
- Gestation Period: Mutual fund generally doesn’t have any such period where the money is locked in. The investor of amutual fund can anytime redeem or buy or sell the product except for the close ended fund which does have a gestation period or lock in period of 3 years. But any ULIP plan has alock-in period of atleast 5 years. The money in ULIP plan cannot be used during this period.
- Liquidity Element: Mutual funds are way more liquid than any ULIP as they are traded on the stock exchange where the investors can buy or sell the mutual fund units in the secondary market. But ULIP plan can only be redeemed after the lock-in period or after maturity.
ULIP and Mutual funds though seem similar but have various differences as stated above. One must do proper analysis before investing money in any of them. Mutual funds are for them who want to reap higher profits but for that, they need to keep the mutual fund for a longer period of time. ULIP are for them who have certain financial needs after a certain period of time as ULIP is beneficial if continued till maturity.