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Difference Between ULIP and SIP

Updated On Jul 13, 2021

Unit-Linked Insurance Plans (ULIPs) are a popular type of investment strategy for risk-averse individuals. These plans combine insurance and investing into one package, providing financial protection and increased returns under favourable conditions.

SIP stands for systematic investment plan, and it entails allocating a small predetermined amount of money to the market at regular intervals (usually every month). The SIP method of investing in stocks and mutual funds is recommended because it allows you to participate in the market while better limiting risk.

Both of these plans have different benefits and can be distinguished by a number of factors.

Difference Between ULIPs and SIP

The following is a comparison of the two to assist you in determining which is best for you.

1. Based On Investment Objective

ULIP plans provide the investor with both investment and life insurance coverage.
You can invest in equities, debt, and hybrid funds using ULIPs.

SIPs, or Systematic Investment Plans, are one of the most common methods of investing in mutual funds. The majority of SIPs are equity-oriented funds.

Both these plans function differently to fetch you higher returns under appropriate conditions.

2. Based On Returns

To generate returns, a portion of the ULIP premium is invested in capital markets such as equity, debt, stocks, and so on, while the remainder is invested in a life insurance policy. It allows investors to switch between funds based on their own objectives and risk tolerances.. 

SIP investments, on the other hand, are made in mutual funds. As a result, they are subject to market risks, which affect the fund's performance. It is a long-term investment option in which the invested amount can be increased or decreased according to the investor's preferences, which affects the SIP investment's returns.

3. Lock- In Period

ULIP plans have a lock-in period of five years.

Only ELSS Mutual Funds have a three-year lock-in period.

4. Fund management charges

ULIPs have substantially lower fund management fees, ranging from 1.35 percent to 1.5 percent.

Mutual funds have significant fund management fees, which can range from 2.5 percent to more than 5%. 

5. Additional Benefits

When further fund units are granted under the ULIP plans after a set period, loyalty benefits are applicable.

There are no provisions for such benefits in systematic investment plans.

6. Tax Benefits

The only mutual fund that can save you money on taxes is the Equity Linked Savings Scheme (ELSS). However, under Section 80C of the Income Tax Act, any sum (up to Rs 1.5 lakh) can be used to reduce taxes on ULIPs.

7. Based On Your Risk Tolerance

Investors must invest in these plans according to their risk appetite. Since, mutual funds are essentially investment vehicles, they are likely to have a higher level of risk than ULIPs.

Mutual funds are a riskier option because they are pure investment products. This is because, in order to create high returns, the portfolio is exposed to a higher level of risk.

Because they invest in capital markets, mutual fund SIPs and ULIPs are both subject to market risks.

Take Away

Both ULIP and SIP programmes are incredibly effective and profitable for investors. However, it is advised that you consider the above factors before making a final investment decision.

Also read - How Can ULIPs Help You Fulfil Your Long-Term Financial goals?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.        

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