Unit Linked Insurance Plan or Mutual Fund |
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Below are some of the differences which will help in taking your decision
based on your own risk appetite and your long or short term goal -
1. MFs are
for the short-term, ULIPs for the long runMFs are popular short-term products.
Retail investors park their money in MFs so that they can exit when they have
made enough gains. But that’s not how ULIPs function. ULIPs are essentially
looked upon as long-term instruments where an investor will systematically
invest every year with a certain lock-in period. ULIPs are natural way of
systematic investment as you pay premiums on a monthly, quarterly, bi-annual or
annual basis. Certified Financial Planner Kartik Jhaveri suggests, “I would say
that for any equity investment of less than 7 years, mutual funds are better
options. ULIPs are good if you are looking at a time horizon of more than 7
years. And more so, I would recommend a regular investment”Moreover, in the
longer term, expenses get evened out. Moreover, MFs also attract larger pools of
investors like corporates who park their money for a short term, thus exposing
the fund to volatility and redemption pressures. On the other hand, ULIPs don’t
attract corporates because of the lock-in period. This is the main difference
between these two product categories, which leads to the differences in their
returns.
2. MFs are aggressive and churn their portfolio Because mutual funds
have to deliver returns in the short-term, they tend to be more aggressive. The
investment philosophy of mutual funds and life insurers differ to some extent.
Typically, MFs are more aggressive players who take larger bets on hot sectors.
MFs churn their portfolios considerably. Life insurance companies, on the other
hand, are far more conservative and take much longer calls on the market.
3.
ULIPs don’t have full exposure to equities While equity MFs may go 100% with
their exposure to equities, ULIPs rarely do so. You have to realize that
comparing a growth mutual fund with a growth ULIP may not be right because of
the difference in equity allocation. For instance in Aviva's growth fund, the
equity exposure is maximum 85% while in the case of mutual funds (growth option)
it would be 100%. Hence, there would be a difference in returns for both these
products. |
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