How To Choose Between ULIPs And Mutual Funds

September 29, 2022

If you are on the lookout for plans that help you grow your wealth as well as build financial security, ULIPs, or Unit-linked Insurance Plans, may be one of your options. These plans are popular for the dual benefits of insurance plus investment that they have to offer. On the other hand, mutual funds are another popular plan of investing in funds is on your mind.

Should you choose one of them or both? Which one is right for your growth? Let’s understand what both these plans have to offer and how you can make investments using the two.

How do Unit-linked Insurance Plans work?

For someone who is not acquainted with Unit-linked Insurance Plans, they can seem like a complex policy. However, to better understand what a ULIP is, you can view the plan as a combination of two benefits – insurance and wealth creation.

At its core, ULIPs can be viewed as a life insurance policy with additional aspects. It offers a life cover, which allows the policyholder to secure the future of their loved ones, in the event that they may have to face any unforeseen circumstances.

The other side of ULIPs, as the phrase ‘unit-linked’ suggests, is market-linked wealth creation. A part of your premium is directed towards investments, making this one of the plans suitable for long-term wealth creation. It allows you to create future security for yourself as well as your loved ones, in a way that you can fulfil some of your significant financial goals.

ULIP calculators are one of the online tools that you can help to draw estimates of how much premiums will you be required to pay for the sum assured you would like. Moreover, these tools may also help you assess the long-term earnings you can gain from it.

Who should buy Unit-linked Insurance Plans?

Before you consider buying ULIPs, remember these are primarily life insurance plans. If you are looking for a life insurance policy, but one which has more than a life cover to offer, unit-linked insurance may be one of the right choices for you.

Remember to use ULIP calculators before you buy these plans, to get a better idea of the returns you can expect from the plan. Knowing all details of the policy before you buy can help you in decision-making.

There is a certain degree of risk associated with these types of policies, which makes them suitable for people who have a risk appetite. Another aspect to know about these policies is that they usually have a lock-in period of five years, i.e., you cannot surrender your policy in the first five years of the plan.

All these aspects make the policy suitable for you if:

  • You are looking for a life cover alongside investments
  • Market-linked wealth creation is on your mind
  • You are willing to accept the vulnerability that comes with market-linked investments
  • You are comfortable with the lock-in period

How do Mutual Funds work?

Mutual funds can be seen as purely market-linked investments. Unlike ULIPs, they do not offer a life cover. To explain it in simpler terms, a mutual fund is a pool of money created with wealth gathered from several investors. These funds are then managed by professional fund managers.

The wealth built with mutual funds is then redistributed proportionately among the original investors. While mutual funds are a suitable plan for someone who is looking for pure investment options, know that they do not offer any life cover, unlike ULIPs. If you do not already have a life cover, you may have to buy one separately.

You can use mutual fund calculators and compare them with results from ULIP calculators to get a better idea of which one can offer you the returns you seek.

Who should buy Mutual Funds?

If you are looking for purely investment options, mutual funds may be right for you. There are various fund options within ULIPs, making them suitable for varying degrees of risk appetite. Mutual funds also tend to be liquid, thus making your investments more accessible to you.

Making the choice between ULIPs and mutual funds is not necessary. Both these plans can be bought and maintained simultaneously. However, now that you know what a ULIP is, you may know that it is the only one among the two plans to offer a life cover. This makes them more suitable for people who seek a comprehensive financial security option.