You may wish to invest to achieve several long-term goals. For instance, you may have plans to buy your own home or save for your child’s wedding. In an ideal scenario, you would want to escape market volatility risks and earn high returns on your investments.So, what instruments should you opt for? Mutual funds and ULIPs are good bets.
What are mutual funds?
Mutual funds comprise a pool where a large number of small investors come together and put in money. The contribution of each individual investor may be as low as Rs 500 per month. The money thus pooled may then invested in various financial instruments. Generally, mutual funds are operated by fund managers who oversee all investments and ensure that investors get maximum returns.
There are two broad categories of mutual funds:
- Equity funds(primarily invest in equity, shares, and stocks)
- Debt funds(mainly invest in debt instruments like debentures)
As a rule, you should consider your mutual fund risk appetite and investment duration while deciding which mutual fund to invest in.
What are ULIPs?
Unit-linked insurance plans (ULIPs) are a combination of insurance and investment. When you buy aULIP,you getlife insurance coverage along with investment returns. The money invested in ULIPs is divided into two parts:
- One part provides the insurance cover.
- The other is invested in the market to receive returns.
Differences between mutual funds and ULIPs
1. Insurance cover: ULIPs come with a built-inlife insurance cover. So, you do not have to buy an additional policy. Mutual funds do not offer this benefit.
2. Lock-in period: This refers to the minimum amount of time for which you have to stay invested in the instrument. Mutual funds offer high liquidity since the usual lock-in period is about a year. The only exception here is the equity-linked savings scheme (ELSS). This tax-saving mutual fund comes with a lock-in period of three years. ULIPs, on the other hand, have a lock-in period of five years.
3. Tax savings: Under Section 80C of the Income Tax Act, you can get a tax deduction on ULIP premiums of upto Rs 1.5 lakh per year. With mutual funds, you get this tax deduction only in the case of ELSS.
4. Returns: ULIPs offer lower returns since they come with the extra benefit of a life insurance cover. Mutual funds offer higher returns in general. However, your actual returns will depend on factors like the type of mutual fund you have invested in, the mutual fund risk, and your investment duration.
5. Cost: The Securities and Exchange Board of India (SEBI) has capped fund management charges for mutual funds at 1.35%. These charges can be much higher for ULIPs because of the complexity of the product.
Should you choose mutual funds or ULIPs?
Make your decision based on your risk appetite, financial goals, and time horizon for the investment.Opt for ULIPs if you want the added benefit of insurance and if you prefer low liquidity and risk. Mutual funds are a good choice if you want high returns and liquidity and provided you have moderate risk tolerance.You could even invest directly in stocks if you are looking for high returns. Click here to open an account with Kotak Securities and get started.