ULIP vs SIP: Which Is Better Investment Option?

by Editor

ULIP vs SIP: Which Is Better Investment Option?

by Editor

by Editor


The reintroduction of Long Term Capital Gains (LTCG) taxes announced in the Budget 2018 brought back to life the debate of ULIPs vs. SIP. Soon after the announcement was made, the threat of LTCG taxes made more and more investors move from mutual fund SIP investments. Fortunately, soon after LTCG taxes were reintroduced, more and more insurance companies started pushing ULIPs as a better alternative for mutual fund SIP schemes.

Though more and more investors now pin down their faith upon ULIPs, the debate about which of the two, ULIPs or SIP, is the better investment option still continues to grow. And that’s why here we present a comprehensive comparison between ULIPs and SIP from an investor’s perspective to help you make the right choice.

So let’s get started!

Definition ULIPs or Unit Linked Insurance Plans are a combination of investment and insurance. Investors can choose to invest in different funds such as equity funds, debt funds, hybrid funds, money market funds, etc.SIP or Systematic Investment Plans is a tool that helps you invest your money in different mutual fund schemes at regular intervals.
BenefitsULIPs offer triple benefits of insurance, investment, and tax savings.SIP only offers investment benefits.
Fund Switching OptionsULIPs allow investors to switch funds according to their risk appetite and requirements, without having to pay anything extra.SIP doesn’t allow investors to switch funds. In case one wants to switch, they need to pay exit charges.
Lock-in Period ULIPs have a minimum lock-in period of 5 years.SIP has a minimum lock-in period of 3 years.
ChargesULIPs levy Policy admin charges, mortality charges, premium allocation charge, and fund management charges.SIP levies fund admin charges, management charges, and exit charges.
Fund Management Charges1.35%2.5%
Portfolio DisclosureULIPs disclose portfolio every quarter. Some ULIPs reveal portfolio each month.SIP discloses portfolio every quarter.
Asset Allocation FlexibilityULIPs allow investors to make a certain number of free switches in a year. In case an investor exhausts the number of free switches, they can pay a nominal fee and avail switching options.SIP doesn’t allow investors to make switches. In case an investor wants to make a switch, they are required to pay entry and exit load charges.
Tax BenefitsULIPs offer tax exemption under Section 80C of the Income Tax Act on the premiums paid against the policy. In addition, maturity proceeds and death benefits offered under the plan are also tax-free.Mutual Fund SIP schemes don’t offer any tax benefits.
Additional BenefitsSome ULIPs offer loyalty bonus to the investors.SIP doesn’t offer any additional benefits to investors.

Now that you know the basic differences between ULIPs and SIP, let’s explore 5 major points of difference between ULIPs and SIP.

1. Returns – ULIPs and SIP both promise lucrative returns to the investors. But when it comes to safe returns, ULIPs win hands down. This is because ULIPs allow investors to have complete control over their investment portfolio, whereas this is not available in SIP. In addition, when you compare the returns offered by both the instruments, you will find that ULIPs offer the better rate of return than SIP. This is because ULIPs invest in fixed income instruments; hence the return tends to be higher than SIP.
2. Taxation – Mutual fund SIP schemes are purely investment instruments. Hence, they do not offer any tax benefits. On the other hand, ULIPs are primarily insurance products and are eligible for tax deductions. Investors can claim tax exemption on the premiums paid against the ULIP plans under Section 80C of the Indian Income Tax Act. In addition, the maturity proceeds and the death benefits offered under ULIP plans are tax-free too.
3. Flexibility – With the number of free switches available at the disposal of investors, ULIPs offer the reasonable amount of flexibility. In case an investor exhausts all free switches provided under a ULIP plan, they can pay a nominal fee to avail switching option. On the other hand, SIP doesn’t allow free switches and investors are required to surrender their existing funds to make a switch. Under SIP, switching comes with exit load and entry load charges, which are usually higher.
4. Transparency – When investing in ULIPs, one of the key assurances that you get is complete transparency. ULIPs are mandated by IRDAI to reveal their portfolio in every quarter. In addition, you get complete control over your investment portfolio with ULIPs. You may choose to switch fund options whenever you want during the tenure of your ULIP plan. Like ULIPs, SIP to is mandated by SEBI to reveal portfolio each quarter. But SIP investors do not get the options of switching funds at their will. Often they are required to make a hefty exit and entry load payments when switching funds. Hence SIP investments in India are presently less transparent as compared to ULIP plans available in the country.
5. Fund Management Charges – As per the rules of IRDAI, the fund management charges for ULIPs cannot exceed 1.35% per year. On the other hand, the fund management charges for SIP investments are 2.5%. So when it comes to funding management charges, ULIPs won over SIP hands down.

Step-by-Step Guide to Choose a ULIP

Figuring out the right ULIP strategy is not that difficult if you have got your basics right. The below enlisted steps will help you zero-in on the right ULIP that will eventually help you address your financial goals as you had planned of:

1: You would be aware of the fact that equity, debt and fund are the 3 basic funds that are generally offered by a ULIP. Therefore, to start with, you should be aware of the underlying funds offered by a particular ULIP.

The knowledge of underlying funds will help you align them with your risk appetite and financial goals. For instance, if you are ready to take risks, equity funds would be a better choice to you; whereas, if you don’t want to take too much risk, debt or balanced funds would be a better option for you.

2: The next step is to look for the applicable charges in a ULIP. There are a number of fees & costs associates with ULIP including:

  • Fund management Charge
  • Premium Allocation Charge
  • Partial Withdrawal Charge
  • Mortality Charge
  • Switching Charge

These charges play a crucial role in deciding the final cost associated with a ULIP and the premium amount you’ll be required to pay.

3: Make sure to check if the ULIP chosen by you offers sufficient flexibility to invest in funds of your choice. There are certain ULIPs that provide flexibility to invest in 8-9 funds; whereas, others might have fewer funds to offer. Based on your financial goals and funds’ performance, you should always be able to switch between the funds.

4: Make it a point to check how many numbers of switching options are available for the ULIP chosen by you. It is undoubtedly one of the most convenient aspects of ULIPs.

5: With ULIPs, you can always switch from one fund to another if it’s not performing well. Therefore, it becomes important for you to find out the number of switches you will be able to make. While, there are some ULIPs that put a cap on number of switches, there are others that offer unlimited switching options.

6: Take your time to decide the objective behind your investment. It always helps to set a financial goal before starting to invest.

  • What is your risk appetite?
  • Are you making the investment for the long term or short term?

For example, planning your retirement is a long-term financial goal; whereas, visiting abroad for holiday is a short-term financial goal. According to experts, it is better to invest in debt funds to achieve short term financial goals and equity funds for achieving long-term goals.

7: Finally, the fund and the type of fund you are going to choose will make the very foundation of your portfolio. Your risk appetite plays a major role in determining the type of funds you should invest in.

Step-by-Step Guide to Choose an SIP

There is no hidden fact that disciplined investing is the primary key to maintain a healthy SIP portfolio is disciplined investing. Power of compounding is the basic principle behind SIP investment. Just make sure not to be affected by volatility of the market. Rather, try to buy as much as units when the market is low and sell those units when the market is high to get the maximum out of your investment.

Besides this aspect, there are other parameters too, that will help you get through the short listing procedure like a breeze.

1: As there is a plethora of funds available in the market, it can be quite a daunting task to choose the right one for you. By conducting performance research you will be able to track the performance of your chosen fund. You can start by tracking the fund’s performance for a period of 3 to 5 years.
Try using online research tools such as online SIP calculator to track fund performance gauge the Return of Investment (ROI) on your SIP. It will help you avoid funds that give better performance when the market is low but collapses the moment the market is low.

2: Doing a thorough research on the fund house is equally vital because your chosen fund will be as good as the fund house. Before making the investment, read about the fund house that is going to manage your fund as well as look into scheme information copies and the key information documents to get in-depth details of the fund house.
Going through this information will help you decide better which fund house will help you steer your investment towards the right path to make you reach your financial goals easily and safely.

3: Take your time to know the fund manager as he will be the responsible entity to handle/mange your funds. Track the performance and ratings of the funds he has managed in the past (especially during volatile market situations). If the manager has proved his/her expertise over different investment categories and fund types, it will translate into him/her designing a sound portfolio.

4: Make it a point to calculate the related expenses associated with an SIP fund as it’s going to be a recurring expense. It is termed as expense ratio which is in actually a percentage of the total assets spent to manage a mutual fund. It’s advisable to opt for SIPs with an expense ratio of up to 1.5%.

5: Exit load is another expense that as an investor you would need to pay at times of early withdrawal from an SIP. You need to pay this fee if you exit the fund before your SIP scheme complete its tenure.
The cost associated with exit load keep on varying depending on your chosen scheme, investment tenure and the amount you have invested in the scheme. For instance, if you decide to exit your SIP scheme at 2% exit load and whose current value has grown to Rs 100, you will only be able to get Rs 98. Exit loads are regulated by (Securities and Exchange Board of India) SEBI and all the fund houses are obliged to follow the directives given by the Board from time to time.

Over to You!

Successful investors often find out the best investment avenue and invest their resources to generate massive returns. Therefore, before taking a plunge into the world of investment, it makes sense for any investor to carefully weigh all the pros and cons of their preferred investment avenue before investing their hard-earned money. And when you weigh ULIPs and SIP on the balance of investment benefits, ease, flexibility, transparency, etc., you’ll notice that ULIPs easily score over SIP.

What do you think about ULIP vs. SIP? Which of the two is better? We would love to know what you think. So do leave us a comment right below.

Leave a Reply

Your email address will not be published. Required fields are marked *