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.

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.

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