what is a mutual fund, mutual funds, invest in mutual funds online, types of mutual funds, mutual fund investment, invest in mutual funds
Are you looking to invest your money but are confused due to several investment options? A good investment option helps to generate wealth and keeps you financially secured in the hour of need. Two such investment options are ULIPs (Unit-Linked Insurance Plan) and mutual funds. Investors often get confused between these investment vehicles. This article aims to serve as an investment guide in choosing the right investment option for your portfolio. Let’s begin by understanding what mutual funds and ULIPs are.
What is a mutual fund?
Mutual fund is a type of investment vehicle wherein an AMC (asset management company) or a fund house pools the funds collected from several investors to invest in difference securities such as stocks, bonds, money market instruments, cash and cash equivalents, etc. This pooled investment is managed by a professional known as a fund manager. There are different types of mutual funds available to an investor to cater to their varying needs.
What is ULIP?
As the name suggests, ULIPs are a combination of insurance plus investment. ULIPs are insurance policies that provide an investor with an opportunity to generate wealth by investing in different types of investment while also providing the security of a life cover to an investor.
Mutual funds vs ULIP
The following table provides an elaborative comparison between mutual fund vs unit-linked insurance plan:
Mutual fund | ULIP | |
Aim | To offer just investment benefits | To provide investment benefits along with life insurance |
Regulatory body | SEBI – Securities and Exchange Board of India | IRDAI – Insurance Regulatory and Development Authority of India |
Lock-in tenure | Most mutual funds do not have any lock-in duration except ELSS funds that have lock-period of 3 years | ULIPs have a lock-in period of five years. |
Recommended policy term | Depending on an investor’s financial goals, it can be short-term, mid-term or long-term | Long term |
Tax benefits | Only Equity-Linked Savings Scheme (ELSS) qualify for a
Section 80C tax deduction of up to Rs1.5 lakh |
Premiums paid towards ULIP are eligible for tax deductions u/s 80C of the IT Act, 1961. Furthermore, the maturity amount is tax-free u/s 10 (10 D) |
Transparency | Mutual funds are very transparent about the underlying expenses such as and asset allocation and fees charged | ULIPs have a fairly less transparent structure than mutual funds in terms of asset allocation and underlying expenses |
Where should I invest my money?
Whether you decide to invest in mutual funds or ULIPs must entirely depend on your portfolio. Your ideal type of investment must align with your investment duration, financial objectives, and risk appetite. Hence, the decision to invest in mutual funds or ULIPs solely rests with the investor and their financial needs. The primary idea behind a ULIP investment is to offer insurance plus investment, while the key goal for mutual fund investments is capital appreciation. Comparing ULIPs and mutual fund investments is like comparing apples to oranges. Happy investing!