With tax benefits included, are ULIPs as good as mutual funds for long term returns?

Oct 11, 2019 | 1 month ago | Read Time: 3 minutes | By iKnowledge Team

One of the most important considerations when making an investment is the incidence of tax. Most people invest in avenues that shield their investments from the Taxman. Equity mutual funds enjoyed exemption on long term gains under Section 10(38), as did ULIPs. Any payment received from an insurance policy is exempt under Section 10(10D). Mutual funds historically enjoyed greater attention from investors because of their higher returns and relative flexibility. But after the Budget 2018 introduced long term capital gains on equity mutual funds, the debate about whether a ULIP is better or a mutual fund has restarted.

A mutual fund is one of the best ways to invest your money. It is an excellent way to raise funds for expenses, and for retirement. Having mutual fund units in your investment account helps you with raising funds whenever required because of their liquidity. Their flexibility in terms of investing and liquidating makes them one of the most sought after and safe investments. ULIPs are excellent options for people who are looking for insurance and investment. These are one of the best ways to raise funds for reasons such as a child’s education. Both ULIP and mutual funds are professionally managed.

Mutual funds are excellent investments for the short term, especially if the investment is a systematic investment plan. They can average out the rise and fall in the market. But ULIPs provide an added insurance cover which is very helpful when raising funds for a specific purpose, such as your child’s education. Investing in mutual funds is not enough in case the person dies before the fund requirement arises. Let’s take an example of a child education plan, or a ULIP from Aegon Life. Under this plan, there are triple benefits that the child and the family get if the policyholder dies during the policy term. The family is paid out death benefit immediately on death. At the same time, all future premiums are waived off and the fund value continues to grow with the growth in the market. The second benefit is an annual income equal to the premium amount is paid to the family during the policy term. The third benefit is that the fund value is paid to the family on maturity to meet the education expenses.

Having insurance helps to meet immediate fund needs in case of loss of revenue and the fund value on maturity helps with education expenses. When it comes to goal-oriented expenses like these, a ULIP trumps over mutual funds, even if it is a relatively shorter time frame.

ULIPs offer tax benefits under Section 80C when the investment is made. Only an investment made in ELSS or equity linked saving scheme leads to a tax deduction. This inherently makes investment in ULIP more attractive.

One of the drawbacks put forward for ULIPs is that they have a lock in period. But the lock-in period works out in favor of the policyholder since the longer-term investments show a steady growth. Even though ULIPs have several charges, such as policy administration charges, mortality charges, policy allocation charges (charges for keeping the insurance policy), they are compensated over the long term. ULIPs offer many funds for policyholders and offer flexibility of switching between one fund to the other. Each insurance company operates many funds for policyholders with different risk appetites. There are different funds for conservative policyholders and different funds for aggressive policyholders.

Let us consider the difference between a ULIP and a mutual fund through an example:


Image source: Economic Times

From the above image, it is evident that over a long term, ULIPs give the same return as a mutual fund. On the contrary, because ULIPs provide an added bonus of insurance.

If you are wondering how to invest money, the answer is it depends on your goals. ULIPs are long term investment options. If you have to raise funds for different goals such as child’s education, child’s wedding expenses, retirement, then a ULIP helps to raise funds with an added insurance cover. They are essential to help manage a long-term goal.

So, define your investment goal and take your pick. Mutual funds, or ULIP? To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.


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