Hello Readers!
We are in the season of “tax planning”, time from January to March of a year, generally, in this season people look for the best investment that can help them save their taxes. However, deciding the best financial product only based on the tax-saving feature is not justifiable. It requires a proper understanding of the product and objective comparison of the features of multiple products to gauge which one is suitable for you.
Among different financial products included under section 80C of Income-tax that help investors save tax, people often confuse between mutual funds (MFs) and unit-linked insurance products (ULIPs). However, to help you choose the most suitable one, here are some factors that can help you draw comparisons.
MF and ULIPs: Ground Level Analysis!
A mutual fund that is pure investment is completely different from ULIP’s which is a combination of investment plus insurance. We know that ULIP’s are also overtaken by MF’s due to the high expenses charged in ULIP’s. However, there are some points of ULIP’s that overrule MF investment.
One of the reasons to not summarily reject ULIPs is that there is an inherent tax advantage. Apart from the tax savings under section 80C of the Income Tax Act, on investments of up to Rs 1.5 lakh, future proceeds from ULIPs are tax-free under section 10(10D).
But what creates the irony here is the fact that ULIP’s are a combination of investment and insurance. Since insurance is not supposed to be an investment vehicle so in this case, the investments are maturing or coming back to you, free of tax.
Well, you have many options if you are willing to choose a financial product just for saving tax. tax benefit under section 80C is available in ELSS funds, but that is the only category of MFs eligible for 80C benefit. There are retirement solution funds in the context of 80C, but those are only a few. In contrast, all insurance products qualify for section 80C.
If you keep a close analysis on the process of ULIP’s we will find that ULIP proceeds are tax-free under section 10(10D), provided the premium paid in a year is within 10 percent of the sum assured. Keeping this in mind, insurers adjust the sum assured suitably while designing the product, except the single premium ones. Equity funds are subject to long-term capital gains at 10 percent above Rs 1 lakh, for a holding period of more than one year.
MF vs ULIPs: Comparison Factors!
Well, the high costs charged by ULIPs compared to MF’s is one such big positive point for choosing MF over ULIP’s. The second positive point is regarding the easy availability of information. For MFs, the data is easily available; you just must visit the fund house’s website, and the expenses charged to all funds, daily, are available in excel format. For ULIPs, the expenses are mentioned somewhere in the product brochure, but you must search for them. And they do not come across as the history of expenses charged, but just as a mention in the literature.
The third reason for choosing MF’s over ULIP is the smaller number of options available in ULIPs. In other words, while there are a few ULIP products with relatively lower expenses, you must hunt for those.
In MFs, there are multiple equity, debt, and hybrid schemes, and the performance data is easily available. In ULIPs, there are equity funds – large, mid, multi-cap, etc. – and debt funds – long maturity, short maturity, etc. The performance data is not as easily available as MFs, but it is possible to dig it out from certain third-party websites.
The fourth positive point for MF’s is the easy availability of liquidity anytime. In MFs, liquidity is available at any time. There are certain funds with exit loads, but there is no absolute lock-in, except in the case of ELSS funds. You can plan your liquidity by investing in exit-load-free MFs. In ULIPs, there is an initial lock-in, subsequent to which there is limited liquidity available.
Conclusion!
We saw in the above context that MF’s and ULIPs both offer tax advantage and are better than other financial products under section 80C, however when it comes choosing one among them, we suggest, compare the products objectively, that you can easily do via digital mediums.
However, in case you do not agree with the costs or performance, or liquidity of ULIPs, and the benefits of MF’s is more suitable to your profile and objective, then I suggest go with the conventional wisdom and settle for MFs plus term insurance.
For any kind of query regarding financial planning 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).