If you are familiar with various investment products, then you`ve probably heard or come across the terms ULIP and Mutual funds. However, for investors who are still struggling to get the meaning of these terminologies, this article will clarify them, giving the similarities and contrasts between the terms. Without further ado, let’s find out to the details of these common terminologies.
What is ULIP?
ULIP is the short form for Unit linked insurance plan. When this product was first introduced in the market, it was popular among many investors, offering good returns. But its popularity was short-lived as it soon emerged that it was a speculative product for making easy money, and it lost its fame as the market became more competitive way down the road. More specially, the insurance companies were forced to restructure the product due to high fees and declining market. Today`s ULIP seems a better alternative in that it is more secure although it offers fewer returns than the previous product.
What are Mutual Funds?
On the other hand, mutual funds refer to a collective of the investment fund or scheme. In this case, a group of investors puts their money in the scheme to create a pooled fund which can then be used to buy bonds, stocks as well as other asset classes by the plan manager. In due course, the fund manager distributes the dividends or profits from these investments to its investors. In some cases, the scheme manager may reinvest the proceeds in the fund, and the investors are reimbursed with a lump sum when they exit the fund.
ULIP vs. Mutual Funds
What are similarities between ULIP and a mutual fund? Well, both of these investment products carry a particular facet of risk that may come up from investing. However, it is imperative to notice that these risks may be reduced particularly in the case of debt ventures, and it increases in the event of equity ventures or investments. This occurrence is because these different types of investments tend to face varying risks, for instance, equity investments are affected by the managerial skills of the scheme`s manager and market volatility. On the other hand, debt investments are affected by risks such as variation of interest’s rates and defaults.
Additionally, both mutual funds and ULIPs offer tax benefits deductions. However, they differ in that the lock-in period for an investor to file his tax benefits is three years for mutual funds while that of ULIP is five years, hence helping the ULIP investor reap returns in the longer run.
What are the differences between Mutual Funds and ULIP?
The key difference between the two is that while ULIP is investment product as well as an insurance cover, mutual funds are purely investment products. Moreover, while mutual funds may not guarantee any reimbursements, some Unit listed insurance plans may pay a set amount in case a policyholder dies or the value of the funds. Thus, ULIP tend to be better quality as compared to mutual funds.
You may also realize that ULIP are more costly compared to mutual schemes in the initial stages, being a lasting product, these charges are spread over a longer time and thus, becomes almost similar to the rate of investing in mutual funds.
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