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SIP vs ULIP

A Systematic Investment Plan, abbreviated as SIP, enables investors to invest a certain amount towards a mutual fund of their choice at regular intervals, say monthly. These instalments can be as small as Rs. 500, proving to be a suitable investment option for beginners and seasoned investors alike. It offers flexible payment frequencies - monthly, quarterly, half-yearly and yearly, which investors can choose according to their convenience. SIPs meet the financial objective of enabling investors build a robust corpus over a long term.

A Unit Linked Insurance Plan, referred as ULIP in short, is an insurance cum investment plan unlike SIPs that are a pure investment plan. It invests in stocks and bonds and generates returns that are closely linked to the prevailing capital market conditions. It is an effective long term instrument for wealth creation, helping you plan for your family’s future. The longer you stay invested, the higher will be the returns. Experts recommend that an investor stays invested for at least a term of 7 to 10 years to enjoy healthy returns.

Difference Between SIP Vs ULIP

CategorySystematic Investment Plan (SIP)Unit Linked Investment Plan (ULIP)
Type of planIt is a pure investment vehicle that invests a specific amount towards a chosen mutual fund at a certain frequency - weekly or monthly or quarterly.It is an insurance cum investment plan.
Lock-in periodLock-in is of 3 years applicable only for ELSS Mutual FundsLock-in is of 5 years
Tax benefitsTax benefits are not applicable, except investments made in ELSS mutual fund that is tax free up to Rs. 1.5 lakh under Section 80C of the Income Tax Income, 1961.Offers tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. Death and Maturity benefit is tax free under Section 10(10D) of the Income Tax Act, 1961.
Withdrawal optionInvested capital can be withdrawn anytime except of ELSS mutual funds under which withdrawal can be done only after the completion of 3 years since the start of the scheme. Investors cannot switch between funds.Partial Withdrawals can be made after the completion of the 5-year lock-in period.
Additional benefitsNo additional benefits applicable.Add-on loyalty benefit is applicable on completion of pre-determined time period after which extra fund units are issued.
FlexibilityInvested capital can be increased and decreased, and generates long term returns.Top-up, Switching and Premium redirection facility offers investment flexibility.
LiquidityEnsures full liquidity as the invested capital can be redeemed by the investor as per his/her convenience.Does not offer liquidity during the first 5 years as the invested capital cannot be withdrawn or surrendered during this period.

Returns in Systematic Investment Plan Vs ULIP

The investments in SIP are made in mutual funds. Hence, they are exposed to market risks that determine the fund performance. It is a long term investment option, wherein the invested amount can be increased and decreased, as per the investor’s preference, which again determines the returns that the SIP investment will generate. The returns can be enjoyed after the lock-in period of 3 years, applicable only under ELSS Mutual Funds.

In contrast, a part of ULIP premium is invested in capital markets like equity, debt, stocks, etc., to generate returns, while the balance is put into a life cover. It offers investors the flexibility to switch between funds, as per their unique objectives and risk appetites. Another parameter that determines the returns is the add-on loyalty benefit that is applicable on completion of given number of policy years and when extra fund units are issued. This is also a long term investment with a lock-in period of 5 years. Though the returns can be availed after the completion of the lock-in period, it is best to stay invested for 7 years to 10 years, if not more, to avail high returns.

Benefits of investing in ULIPs

Primary benefits

A part of the premium towards a ULIP is invested in capital market instruments like equity, debt, stocks, etc. This premium is collected from investors by a professional Asset Management Company (AMC) and invested in mutual fund schemes as per the unique risk appetite and financial goal of the mutual fund scheme. The investment objective is to generate as high returns as possible, as per the existing capital market conditions. The rest of the premium is invested in a life cover.

Risk factor

SIPs of mutual funds and ULIPs both are exposed to market risks as they invest in capital markets.

Fund management fees - Fund management fees of 1.35% for ULIPs are comparatively lesser than the fees involved in mutual fund investments, which usually are 2.5% or less.

Tax benefits

All investments in ULIP are eligible for tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. Maturity benefit is tax free under Section 10(10D) of the Income Tax Act, 1961.

FAQs on Systematic Investment Plan Vs ULIP

Is ULIP better than mutual fund?

Investment decisions vary between individuals, depending on each of their investment objectives, risk appetite and various other factors. However, here are some of the factors that make ULIP score over mutual fund investments:

Primary benefits

A part of the premium towards a ULIP is invested in capital market investment schemes like equity, debt, stocks, etc. This premium is collected from policyholders by a life insurance company and invested in the fund schemes as per the unique risk appetite and financial goal of the policyholder. The investment objective is to generate as high returns as possible, as per the existing capital market conditions. The rest of the premium is invested in a life cover. This is unlike mutual funds that are also exposed to market risks, but do not offer any life cover.

Fund management fees

The usual fund management fees for ULIPs, quoted at 1.35% or less, are comparatively lesser than that of mutual fund investments.

Tax benefits

All investments in ULIP are eligible for tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. Further, death and maturity claims are tax free under Section 10(10D) of the Income Tax Act, 1961. In contrast, for mutual funds, only ELSS mutual fund is tax free up to Rs. 1.5 lakh as per Section 80C of the Income Tax Income, 1961.

Is now the right time to invest in ULIP?

There is no specific right time to invest in ULIP. One must invest at the earliest possible to gain the most out of it. It is an insurance cum investment product. While a certain part of the premium is invested in capital markets, the remaining is used for providing a life cover. It often proves to be a more effective long term investment as opposed to investing in two separate investments in a life insurance policy and a mutual fund scheme.

Is ULIP a good investment?

Here are some of the factors that make ULIP an effective investment for long term investors:

  • It serves the dual purpose of investment and insurance.
  • A part of the premium towards a ULIP is invested in capital markets according to the existing capital market conditions. The rest of the premium is used for life cover.
  • ULIP investments come with market risks.
  • Fund management fees are of 1.35% or lower than most other investment options.
  • ULIP investors can avail tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. The maturity and death benefit is tax free under Section 10(10D) of the Income Tax Act, 1961.

Is ULIP tax free?

All investments in ULIP are eligible for tax deductions of a maximum of Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. Claims from ULIP investments are tax free under Section 10(10D) of the Income Tax Act, 1961.

What are some of the best ULIP plans of 2019?

The following are some of the leading ULIP policies of 2019:

  • Aegon Life iMaximise Secure Plan
  • PNB MetLife Smart Platinum Plan
  • Bajaj Allianz Future Gain
  • SBI Life Wealth Assure
  • ICICI Prudential Wealth Builder II
  • MAX Life Fast Track Growth Fund
  • LIC Market Plus-I Growth Fund
  • HDFC Life Pro Growth Plus
  • SUD Life Dhan Suraksha Plus
  • TATA AIG Life Invest Assure-II Balanced Fund

What are ULIP funds?

A Unit Linked Insurance Plan (ULIP) is an insurance cum investment plan. It invests in stocks and bonds and generates returns that are closely linked to the existing market conditions. It is a long term investment plan with a lock-in period of 5 years. It is advisable that investors stay invested for at least a term of 7 to 10 years to enjoy better returns, instead of availing the benefits immediately after the completion of the lock-in.

What is a ULIP policy?

A Unit Linked Insurance Plan (ULIP) is an insurance cum investment plan. It invests in bonds and stocks to achieve returns that are closely linked to the existing market scenario. It is a long term investment plan with a lock-in period of 5 years. It is highly recommended that investors stay invested for at least 7 to 10 years to enjoy better returns, instead of availing the benefits immediately after the lock-in period.

What is the fund value of a ULIP plan?

The fund value or the Net Asset Value (NAV) refers to the total value of all the holdings in the ULIP portfolio. NAV per unit can be calculated by dividing the existing NAV with the number of units held by investors at that point of time.

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