Hello Readers! 

ULIP or Unit Linked Insurance Plan, is attracting investors towards it, because of its tax advantage. It offers tax-free returns at maturity which is a clear advantage for long term investors when compared with mutual funds which are taxable at redemption.

Well, it is always a question that does only a free-tax status of returns from ULIP, is a valuable reason to choose ULIP over mutual funds. Is it not mandatory to look over other factors to determine which is more profitable, mutual funds, or ULIP’s?

Here we are discussing some factors that make ULIPs inflexible and demanding, read to know so that you can choose the best option for your investment.

Portability

ULIP offers the facility of switching between various funds but with the same insurer. That means once you invest in ULIP offered by a life insurer, you cannot switch out of the insurer, no matter whether you are happy with your money management or not or whether you are satisfied with the service offered to you. Once you invested in the ULIP, you cannot simply redeem and switch over to another ULIP.

Added to that ULIP comes with a mandatory lock-in period of five years, you cannot redeem your investment before that certain period. In case if you redeem, charges will be levied. Once you redeem, you will have to apply for another ULIP from a different insurer and undergo the entire process including medical clearance again.

However, the case is not the same in mutual funds. In mutual fund redeeming your funds or switching to another fund is a game of few clicks online and you are done (Redeeming your fund may attract a kind of exit load and capital gain tax).

Costs Levied

Fund management costs in both Mutual Fund and ULIP’s are highly comparable, however investment in ULIP’s requires some other charges you should be aware of.

Firstly, there is a premium allocation charge in the first year, which is deducted before your premium amount is invested. There is a mortality charge each year that gets deducted from your premium, again before it is invested. There are monthly policy administration charges too which get deducted from your fund value.

Well, now the ULIP’s return the mortality charge paid at maturity, but instead of returning, if this amount would have been invested in the start, the gains could have compounded over the years.

All these charges levied in ULIP are not seen in the upfront, but it impacts your investment in ULIP as a result, it lowers the amount invested as compared to the premium you are paying.

Lack of Flexibility

ULIP’s offer no flexibility, no plans like Systematic Investment, Systematic Withdrawal, and so on. You have to remain invested through the term of eth policy. In case if you land in a financial emergency and want to stop your premium payment, your policy itself will lapse. Withdrawal of the fund is allowed, but it comes with disadvantages.

A mutual fund offers the facility to pause your monthly installments (SIP installments) in times of financial crisis, you can again resume your SIP after a certain period.

ULIP’s have their own set of advantages, however, there are many factors that make ULIP less profitable than mutual funds. Tax-benefit on returns is important but transparent performance, transparency on costs, and flexibility are the other factors that help you select an investment instrument appropriate for your goals.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).