The Heated Debate: Are ULIPs better than Mutual Funds post LTCG tax?

Sep 16, 2019 | 2 months ago | Read Time: 3 minutes | By iKnowledge Team
Are ULIPs better than Mutual Funds post LTCG tax

With the re-introduction of Long-Term Capital Gain (LTCG) Tax, investors have started re-considering their investment strategy. The LTCG Tax has further incited the debate of investing in ULIP plans vs mutual funds, to avail maximum gains and tax saving. What most investors are wondering is what is the LTCG Tax and how it affects the investments.

What is LTCG?

LTCG tax was introduced by Finance Minister Arun Jaitley in his budget for the fiscal year 2018-19. LTCG is a tax on products such as shares, real estates and other market-related products. Under LTCG Tax guidelines, investors must pay a 10% tax on returns on the above products. The Tax is applicable to products that have been held by investors for a minimum period of one year from the date of acquisition.

ULIP plans vs Mutual Funds:

When weighing the benefits of ULIP plans vs Mutual Funds, ULIPs may prove to be a better option as they offer a combination of investment and insurance. Since mutual funds do not provide life insurance, investors may be hesitant in investing in mutual funds. However, one must take into account the fact that these products have their advantages and disadvantages.

Here, we discuss the key differences between the two.

When you consider taxation in ULIP plan vs mutual funds, ULIPs have emerged as winners. In mutual funds, the returns from the fixed deposit are taxed at a marginal rate whereas debt funds are charged 10% tax, according to the new LTCG Tax guidelines.  However, returns on ULIPs are tax-free.  This is because ULIPs are investment-cum-insurance policies when compared to mutual funds, which only offer investment opportunities.

On the other hand, mutual funds have an advantage over ULIPs when it comes to ease of liquidity. Usually, ULIPs have a lock-in period of 5 years. This means that if you have purchased a ULIP, you can withdraw money only after the completion of the lock-in period. In contrast, mutual funds can be liquidated as per the wish of the investor. This gives mutual funds an edge over ULIPs since investors have access to their returns in times of need.

Both ULIPs and mutual funds offer some degree of flexibility when it comes to switching between funds. In ULIPs, you can opt for either equity or debt fund, depending upon market performance and the subsequent gains on investment. If you have bought mutual funds, you have the option to change your investment strategy from time to time. You can always switch from one scheme to another, based on their performance.

A factor that works in favour of ULIPs is the element of protection that comes with them. When you pay premiums for ULIPs, they get allocated for investment and life cover. Not only do you get returns on your investment at the end of term maturity, but also life cover in case of unfortunate events like accidents and death. Mutual funds are pure investment instruments without the benefit of a life cover. In such a case, you have to spend additionally to buy life insurance.

Many individuals have long-term plans when it comes to investments. These may include education plans for children, their marriage, a home for retirement or a vacation post-retirement. A ULIP helps in building a corpus over the years through strategic investment. You can compare returns on ULIP plans vs mutual funds by analysing their performance over a period of years.

You can also calculate your gains on ULIPs using a ULIP return calculator. Many online websites calculate ULIP returns based on the amount of investment, starting period, annual income and other parameters. This gives you an estimate of future returns from ULIPs.

Buying a ULIP plan online helps save administrative cost and agent fees. This is one of the ways of lowering your ULIP premiums.

Find out more about ULIPs and Aegon Life’s products like term insurance and other products, visit our home page.


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