Compare ULIP and Mutual Funds Before you Choose your Investment
In these testing times as well as since times immemorial, man has been on an unending quest to go for broke or at least go on a limb to make a fortune for him. Different time periods saw different trends that the men of that particular time followed. Most of the times, a single person or a very few people took the initial plunge and when others saw their success, followed them to go to the same destination. However, there are different routes to get to wherever you would aim to go and ultimately reach. In the world of finance and investments too, there are different schools of thought when it comes to creating wealth. While there are some us who think that a ULIP investment is the way to go, there are others that vouch for the mutual fund route.
Although many people often confuse themselves as well as others when it comes to these two, it makes no sense to confuse one with the other since both of them are as far apart from each other as chalk and cheese. To elaborate, ULIPs are investment tools that are fund operated. The charges are deducted for the purpose of operational costs and the rest is then invested across investments for the purchaser. Investors can exit a mutual fund investment whenever they want. The same does not apply to a ULIP, which has a lock-in period of 5 years. This feature inculcates a habit of saving, helping policyholders generate a corpus.
Although both of these investment vehicles have their own share of costs attached with it, there is a degree of difference between the two. While comparing the two vis- a- vis each other it makes sense to understand the various aspects that differentiate the two and hence you can understand this standoff of ULIP vs mutual fund better. For example, where on the one hand a ULIP has an insurance or life cover attached to it, when you purchase a mutual fund, there is no provision of any protection. On the other hand, you will have to purchase an insurance cover separately.
Where on the one hand, each and every cost associated with the management of the fund is openly divulged to the investor in a ULIP, the same cannot be necessarily said of a mutual fund. Actually a mutual fund is basically a shared risk product for buying equities; a ULIP is a product that invests in both the worlds and gets the best of both worlds for the investor when he stays invested beyond the stipulated five-year lock-in period. This is another main difference between ULIP and mutual fund vehicle to financial freedom.
On the one hand, where an investor in a ULIP investment way of creating wealth can avail of a triple tax benefit, conversely, when a person invests in a mutual fund scheme, he has to pay either a short or long term capital gains tax. Additionally, not all mutual funds can afford a tax saving for the investor in such mutual fund scheme of making wealth. An added advantage when you invest in ULIPs is that other than the mortality charge, the entire amount of investment is tax free.
There is yet another underlying difference in both of these avenues of creating wealth. While a mutual fund can seem to be beneficial in the short term, ULIPs have been seen to outperform mutual funds in the long run. This could be because of the sustained high cost of maintaining a mutual fund, whereas when the money is vested with a ULIP investment, the cost of maintaining it is incurred just once, at the beginning of the tenure. That proves to be the Achilles heel for the mutual fund way of going to the money destination. Hence, the ULIP investment stands on the victory podium if we run the marathon with it.
Another basic difference between going the mutual fund way and the ULIP route to wealth generation is that while ULIPs have the lock-in fixed at 5 years, there is no such compulsion on the investor going with a mutual fund. And yet, when you have to constantly save for the long term, then putting your nose to the grinding wheel will stand you in good stead if it is the ULIP investment that you have a tendency towards. One of the most important factors is that although both can inculcate in their respective vehicles, it is only ULIP which with a compulsory lock-in period of five years lends a helping hand towards a long term wealth creation. This discipline is voluntary when it comes to the mutual fund way of generating wealth.
Thus, to sum the argument up, it is a better advice to expend that although the mutual fund starts off leading the ULIP all the way to the midpoint, it is advisable to bet on the ULIP in the longer race when it comes to creating wealth. Besides, the ULIP insurance also has lesser costs associated with it while also being more transparent than any other type of investment.