New investment tools keep popping up with time. They’re all unique in their own way, and yet have the same goal of multiplying investors’ money. The path they take to make that a reality is diverse, with some riskier than others. It is up to the investors to decide whether or not their risk appetite has the same wavelength as a particular investment tool.
What are ULIPs?
ULIPs aren’t as famous as some of the other investment tools out there. Started in 1971, ULIPs are innovative schemes that offer the benefits of insurance as well as an investment at the same time. When you buy a ULIP, the insurance company doesn’t just offer you life insurance, but it also invests a certain amount of your money in some kind of investment scheme.
Coming to how a ULIP functions, you need to pay a certain amount of money, called the premium, to the insurance company. In return, you get a life cover and the rest of the premium is invested in the market.
What are mutual funds?
Mutual funds are possibly the most common investment scheme today. They’ve grown in prominence in the last couple of decades, and for good reason! Investing in mutual funds allows investors with moderate to low-risk appetite the right amount of exposure to the securities market.
How it works is a lot of individuals pool in a certain amount of money. This is then invested in certain equity and debt instruments by a fund manager. The returns are later distributed depending on how much each investor put in. There are hundreds of different types of mutual funds out there.
So, which one should you invest in?
The answer to that depends on two things: the differences between the two instruments and the kind of investor you are. While only you can answer the latter, here are a few key differences between ULIPs and mutual funds.
- Return on investment
ULIPs offer high returns over an extended period of time. Equity mutual funds also have a similar return profile, with the returns on debt mutual funds slightly on the lower side.
- Maintenance cost
This is where the two schemes are significantly different. Mutual funds incur low costs and professional management fee as SEBI (Securities and Exchange Board of India) has capped the expense ratio at 1.05%. ULIPs, meanwhile, have no such restriction, and so it costs a lot higher to maintain to invest in it.
- Lock-in period
Both ULIPs and mutual funds come with lock-in periods. However, being an insurance-centric product, ULIPs have a slightly longer lock-in. They tend to vary between three to five years. During this period, your investment cannot be redeemed, which is somewhat concerning as anything can happen over such an extended period of time. While mutual funds also come with a lock-in, it tends to be only for a year or so.
Both ULIPs and Mutual Funds have their own set of advantages and disadvantages. However, which one to select is entirely dependent on your investment horizon, risk tolerance, and financial objectives.
Mutual funds are a good choice if you’re a short-term or medium-term investor looking for more liquidity and still having a high or medium risk appetite.
ULIPs, on the other hand, are better suited to long-term investors who want life insurance coverage and have a moderate risk appetite.