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Are 4G ULIPs As Good As Mutual Funds?

Joan Mathews Joan Mathews 04 February 2020

4G ULIPs are being recognized among the best investment options in recent times. Read this article to know more about how the new age unit linked insurance plans fare against mutual funds.

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Among all the life insurance products, Unit Linked Insurance Plans are the best investment tool for wealth creation - particularly the new-age ULIPs (4G ULIPs). A ULIP is an insurance cum investment product, which provides risk cover and invests in qualified instruments like stocks, bonds or mutual funds (according to the preference of the policyholder/investor). While ULIPs are an excellent investment choice, they have been regarded as expensive by many. For this reason, insurance companies have introduced new-age ULIPs, whose charges like premium allocation, policy administration are usually nil. They offer more flexibility when compared with traditional ULIPs.

On comparing 4G ULIPs and mutual funds, it has been found that the fund management charges of the former are capped at 1.35% of the fund value yearly, and this is much lower than the expense ratio cap of 2.50% on equity MFs. 4G ULIPs also have additional features such as zero policy administration charge, zero premium allocation charge, etc. and the mortality cost of the life insurance cover gets returned at the time of maturity. In case of equity mutual funds, long-term capital gains (LTCG) tax is levied at 10% on long-term capital gains above Rs. 1 lakh a year. ULIPs, on the other hand, are not liable to LTCG tax.

4G ULIPs have a significant tax advantage over mutual funds. Tax deduction can be claimed under Section 80C of the Income Tax Act, 1961, for the premiums paid toward the policy. The maximum deduction that can be claimed under this section is Rs. 1,50,000 during a financial year. Additionally, proceeds from the policy are completely tax-free in the hands of the receiver under Section 10(10D) of the Income Tax Act, 1961. In case of mutual funds, only investments in or ELSSs qualify for tax deduction under Section 80C.

How to Invest in 4G ULIPs?

Given that ULIPs are long-term investments, they are best-suited for investors in the age group of 25 years to 45 years. Those whose investment horizon is less than five years are advised to consider other investment avenues as 4G ULIPs have a 5-year lock-in period. There are various means by which an entity can invest in a ULIP– annual premiums and monthly premiums which acts as a systematic investment plans are the most preferred ones. 4G ULIPs work on the concept of rupee cost averaging, which essentially means that the cost at which units of a fund are purchased is averaged.

In the current market scenario, 4G ULIPs are considered one of the best investment options. They allow investors to shift between equities and debt, even in the compulsory lock-in period. Individuals are advised to take advantage of this facility and switch funds based on the market conditions.

Joan Mathews
Written by Joan Mathews
Joan has over 4 years of experience writing for the BFSI industry. She enjoys watching mystery TV series, listening to 80s classics and spending time with her furbabies.