Comparative study of Mutual fund returns and Insurance returns

There is an abundance of financial products available that help us invest our money. Depending on our needs, limitations and financial goals we can opt for any of these products to either safeguard or create more wealth.

Mutual funds are one of the most common investment options today. It is an investment vehicle that accumulates money from investors and then invests it on their behalf in different assets to earn a return. Mutual funds though are often confused with another financial product, Unit-Linked-Insurance-Plans or UILPs. Both ‘equity-ULIP’ and ‘equity-Mutual Fund’ invests their money in stocks. This makes their returns unpredictable in short-term. But in long term their net of inflation returns are good. UILPs though, serve the dual purpose of providing an insurance cover as well as a return on the investments.  

The Difference.

The biggest difference between the two is that a UILP would provide an insurance cover as well. When we invest in a mutual fund unit, the investment is utilized to buy direct stocks. But when we invest in a ULIP, investment is used to buy mutual funds units which in turn buys stock. Therefore, buying stocks in ULIP is a two step process and in the mutual fund, it is a one step process. Moreover, every month, a part of investment made in UILP is taken as insurance cover. This acts as the ‘protection element’ or ‘insurance premium’. In case the investor meets with an accident and passes away, the insurance company would compensate his family with the fund value.

Tax Savings.

ULIPs allows the investor tax deductions, as per Section 80C of the Income Tax Act. Money invested in a ULIP is deducted from the total taxable income of the investor. Mutual funds, on the other hand, do not always help in reducing taxes.

When to ULIP, when to Mutual Fund.

This answer depends on the needs of the investor. If you need your investment to be liquid—be easily convertible into cash on short notice, then it is better to opt for a mutual fund. ULIPs have a lock-in period of minimum five years. During this time, you cannot redeem your money.

Conclusion.

ULIPs are best suited for investors with a long-term financial plan of wealth creation and insurance. Additionally, ULIP’s are for investors who are not familiar with the equity market or different fund options available with mutual funds. Simply put, UILP is for investors, whose requirement is both insurance cover and decent returns. But long term returns of ULIP will probably never beat returns of a diversified equity mutual fund.