Many people misunderstand a Unit Linked Insurance Plan to a Mutual Fund. In structure, they may have some similarities but in objective they are very different. Generally Unit Linked Insurance Plans are suited for the long term investments of time duration of 10 years and MF can be a good option for 5 years.
Objectives are Different
ULIP-funds can be seen as an instrument for long term saving and insurance covers along with some investment benefits. On the other hand, mutual funds are purely an investment tool made for asset valuation. For a salaried person, aspiring security and savings for future needs, ULIP-schemes offer a complete solution that provides a structure ideal for long term financial planning.
Program Duration
In ULIP-programs, charges are front loaded which means most of the charges are levied in the first few years of the plan. So, short term investment will not make a sense in case of this scheme. Mutual funds are a good option if you have a time window of 3-5 years. But for a longer 10 year duration, ULIPs stands out as most of its charges even out.
ULIP-plan vs. Standalone MF + Life Insurance Policy
In unit linked plan, the premium money is divided into investment and the risk cover cost. The risk cover charge increases with the age and investment allocation decreases. Various fees and charges like administration fees, margins etc. are levied by the insurer from the combined premium.
Whereas, if one opts for insurance and mutual fund separately, same charges and margins will be levied separately on both of them which may increase the underlying processing charges of the whole plan.
Risks Involved
The risks involved are higher in mutual funds. But Unit Linked Plan gives the consumer an option of choosing for an appropriate portfolio which may be high risk high return equity, low risk low return bank deposits and debts, or the balance fund which is a combination of two. In this way, a policyholder can minimize the risk in this plan.
Financial Planning Perspective
The ULIP-policy can be considered as a unified tool for financial planning which includes everything. There are also Tax Benefits involved in it on portion of money used for insurance coverage. But, we can look at MFs as a pure equity investment tool which helps in investing in well-researched equities by paying a marginal fee to the fund manager who analyses the portfolio rather than investing money independently in individual stock.
The better option
Both of them have equal significance and which one suits better for someone totally depends on that individual. If you have an idea of stock market and you are ready to bear the responsibility of independently managing the various financial schemes you have taken, you can invest in MF for raising equity and take a life insurance policy for future safety.
But, for a working professional who can’t spare much time, or a person totally aloof from the knowledge of this field and wants to get all his needs addressed at one place, he can opt for a ULIP-policy which decreases the workload to just one premium for everything.
Your comments are welcomed for doubts, queries and further discussions.
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