ULIP plans vs. Mutual funds : Two sides of one coin

The insurance plans enjoy tax-free status under section 10(10) d, i.e., returns from investment in ULIP plans are not subject to any tax. However, MFs do not have the same benefit of tax-free income from their returns. Equity Mutual funds are taxed @ 10% for the long term and 15% if one books profits before one year. And debt funds are taxed @ 20% with indexation when held beyond three years. Thus, ULIP plans held for the required period or longer would yield tax-free returns, whereas MFs would be taxable.

The ULIP plans give risk coverage in the form of life cover natural, accidental, and reimbursement of SA on the diagnosis of listed critical illnesses. The MFs offer life cover in SIP investment that by selective AMCs up to the age of 55. Though one is charged for covers opted by the insured, however, it becomes a convenience for an investor to manage both investment and risk covers through one plan. A sizeable investment in a ULIP plan with decent coverage can be an essential part of your financial planning.

IRDAI has rationalized the expenses charged in any scheme, and the insurance companies have altered the plans to make it cost-effective. The premium paying period has been enhanced to 5 years, and one can withdraw after a waiting period that enables one to remain invested for a more extended period. The AMC expenses held for ten years and above in a ULIP plan could be lower than some of the schemes of MFs if held for the same period or more. These reduced expenses certainly can translate into better returns than many mutual fund schemes since all costs (AMC @1.35% pa+ .50% risk cover) could be lower than MFs schemes which are as high as 2.5% pa.

One who opts for ULIP plans can choose between the schemes available in the category. Each plan has three variants- equity dominance, debt-oriented, and higher allocation to money market instruments. The variety gives an option to the insured to make the switch between the schemes based on the market conditions enabling them to capitalize on market corrections or any other reasons. One can enjoy this facility without booking profits that wouldn’t attract any taxes, whereas, in mutual funds, any profit booked would attract taxes- short term or long term as per tax rules of the scheme.

The investment options have to revolve around the stock market as the Bull Run we have witnessed post covid it is a proven fact that equity participation should be imperative. Your saving through ULIP not only gives benefits as stated above but also helps to stager investment to take benefit of Cost Averaging and helps to make compulsory savings. You can avail of your 80c tax benefits too by investing in these schemes. There are numberless schemes available from different life insurance companies, and it is vital to choose which has a decent track record, sound portfolio, and least expenses. We would suggest approaching an advisor to take a guided route to pick the right product that could help achieve your financial goal.