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Difference Between ULIPs, Mutual Funds and FDs

Published On Aug 04, 2021

ULIPs are the most worthwhile ways to start investing in the equity market. Moreover, apart from this, ULIP plans also offer a combined benefit of investment cum insurance to the individual. With a wide range of fund options to invest in, ULIPs works as a great long term investment instrument to achieve the financial objective of life. 

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.

A fixed deposit or an FD is an investment instrument that banks and non-banking financial companies (NBFC) offer their customers. Through an FD, people invest a certain sum of money for a fixed period at a predetermined rate of interest in an FD.

Reason Why You Should Purchase ULIPS

Here's a list of reasons why you should purchase an ULIP for investments: 

  • Flexibility 

ULIPs are very flexible as they give you the option of switching funds during the policy period. In fact, it is the only financial tool that offers such flexibility. It allows the insured to move their investment amount fully or partially from one fund to another. You can opt for any one of them as per your needs and performance of funds. This includes growth, balanced, equity, and income funds. In fact, you can easily make three to four switches every year without any cost. All you need to do is to choose the policy, change its fund allocation, and go for it till your policy ends so that you enjoy long-term benefits.

  • Better Returns

This is yet another reason why ULIP is the apt option for long-term wealth creation. As compared to other products, ULIPs have great potential to gain good returns as they invest the premium paid by you in several asset classes. It also gives you the option to opt for a different fund every year as per its performance.

  • Tax Benefits

ULIPs also allow tax benefits as per Section 80C of the Income Tax Act, 1961. An ideal tax-saving option depends on several factors such as lock-in period, maturity benefits and amount of return. Thus, as compared to other investment options, ULIP is relatively the best investment option as you buy the policy once but get tax benefits every year till the end of the policy term

  • Lock-in Period Duration 

If you want to develop a habit of disciplined investing, then ULIP is the ideal bet for you as it comes with a lock-in period of five years. Since ULIP is a long-term investment option, investing in a single ULIP would be sufficient. Generally, the lock-in period is calculated on the basis of the date of policy issued and the premium amount has to be paid monthly or annually as a lump sum. Moreover, the policyholder can choose to discontinue the policy after the lock-in period of 5 years and can withdraw money as per the need.

Reason Why You Should Invest In FDs

Fixed deposit is always a better option to invest as it is purely designed for your investment and savings related needs. If your intention is to save and invest for the future, it is advisable you invest in fixed deposits. 

  • Purpose Of Buying

Fixed deposit is a purely investment product whereas term insurance is an insurance product. Investment is something that helps you save for the future.

  • Term Period

Fixed deposits are best for both short and medium term investments whereas term insurance plans are designed for long term investments. You can invest for a period of as low as 7 days in fixed deposits.

  • Premiums

You can invest a minimum amount of Rs. 1000 in bank fixed deposits there is not case of premiums. Hence a more simpler method of investment.

  • Return Value

Fixed deposits offer fixed returns on investments and it is mentioned in the beginning when you open your deposit. It depends on the bank regarding their own choice and methods of returns that they want from their customers. 

  • Withdrawal

Both fixed deposits and term insurance policies can be withdrawn. You can withdraw your fixed deposits at any time by sending a notification to your concerned bank.

Advantages of Mutual Funds

There are many reasons why investors choose to invest in mutual funds with such frequency. Let's break down the details of a few.

  • Advanced Portfolio Management

When you buy a mutual fund, you pay a management fee as part of your expense ratio, which is used to hire a professional portfolio manager who buys and sells stocks, bonds, etc. This is a relatively small price to pay for getting professional help in the management of an investment portfolio.

  • Dividend Reinvestment

As dividends and other interest income sources are declared for the fund, they can be used to purchase additional shares in the mutual fund, therefore helping your investment grow.

  • Risk Reduction (Safety)

Reduced portfolio risk is achieved through the use of diversification, as most mutual funds will invest in anywhere from 50 to 200 different securities—depending on the focus. Numerous stock index mutual funds own 1,000 or more individual stock positions.

  • Convenience and Fair Pricing

Mutual funds are easy to buy and easy to understand. They typically have low minimum investments and they are traded only once per day at the closing net asset value (NAV). This eliminates price fluctuation throughout the day and various arbitrage opportunities that day traders practice.

Take Away

Hence, with so many investment options available in the market, it gets difficult to choose the one befitting your investment needs. Thus, you may choose ULIP as your investment instrument as it maintains a great balance between providing insurance cover and generating great returns.

Also read 

Can Senior Citizens Buy Term Insurance?

Difference Between Endowment Plans, Term Plans and ULIPs

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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