Investment banking

Comparison Chart of Traditional Life Insurance, ULIP and Mutual Funds

It is said a smart person always saves the income for future emergency but the smarter one invest the income even more smartly to increase the saving. Thus, it is very important that whenever you decide to invest, check out all the options available in the market and if it will match your requirements or not. In this article, we will explore the types of investment and which one is apt for you.

Types of Investment Plans

  1. Traditional Life Insurance- In this, a person buys a life coverage policy for fixed period and pays premium for that annually, monthly or quarterly and receives the sum assured as mentioned in the policy. It can be for long-term (for instance, the money received after the death of insurer) or short-term (for car or house or education purpose). It is for those who prefer to do safe investment with guaranteed coverage.
  2. ULIP (Unit Linked Investment Plans) – This policy is apt for those who need life insurance + investment profits. In short, under this policy, some part of the premium you pay will be invested in mutual funds, which will further be invested in stocks. Thus, here the insured receives the insurance coverage as well as fund unit as per the performance of the stock in which his/her money is invested. ULIP is also flexible in nature as you can anytime increase the policy amount. It is also a good way to save tax, however it is expensive.
  3. Mutual Funds- This is for only for those who just want to invest. In short, here the funds of different policy owners are directly invested in stocks of various industries and thus, the policy owner receive the return on investment as per the performance of the stock and the number of the units he/she purchased. It keeps on fluctuating, thus, the risk involved is high. Moreover, there is no tax benefit for the investor as such. Now, you may think, why invest in mutual funds, if it is volatile, risky as well as offers no tax benefits? The point to keep in mind is that it is not that costly and can offers tax benefits as per section 80 C if one invests in Equity Linked Savings Scheme. So, the dividend you receive after investing is completely tax free. Moreover, one really does not need to be an expert to invest on this plan. Still if required, you can hire an expert.

If you are wondering, which method will be the best for you to invest in mutual funds, then ‘Systematic Investment Planning’ is your answer. SIP allows you to invest your money on mutual funds on fixed period. In short, you can purchase units, every month as per your choice. Plus, as mentioned before, mutual fund is not expensive so you can start your investment with an amount as low as Rs. 500.

Here, how you invest depend on the Net Asset Value. If NAV is high, it is obvious you will buy fewer units and if it is low then, the units bought will be more.

Comparison Chart of Traditional Life Insurance, ULIP and Mutual Funds

Basis Traditional Investment ULIP Mutual Funds
Objective If one needs life coverage. Life protection It is apt for both protection and investment It is purely for investment purpose
Investment Return Sure return but very low Return may vary because of fluctuation In case of investment amount. However, insurance coverage amount will be given. Highly volatile in nature, thus, returns depend on performance of funds.
Tax Benefit Tax benefit is given as per section 80C Tax benefit is given (Sec 80 C) No tax benefit unless invested in ELSS
Flexibility No flexibility at all It is flexible as investor can decide how much amount to spent on insurance and how much mutual funds All funds collected are spent on shares.
Regulated by IRDA (Insurance Regulatory and Development Authority) IRDA (Insurance Regulatory and Development Authority) SEBI (Securities and Exchange Board of India)
Security Very secure because of guaranteed returns Not so secure Same, not so secure
Which is better Best in terms of insurance protection i.e. life security but no investment benefits Mid way as it is apt for both investment and insurance (security). It is just for investment purpose with no insurance benefits
Transparency Not transparent at all Transparency is there if one knows where the company has invested the money Completely transparent. One can track the investment portfolio quarterly.
Money return period Till the insurance is not mature One need to invest for at least 3 years to let the investment develop One can buy or sell anytime. No restriction. Though long period investment is suggested for high returns.

Beside these, there are few other options available where one can invest-

  • Fixed Deposit- It is apt for those who need to save money without taking any risk at all. Here, the person with a bank account can easily open the fixed deposit account and deposit the money for a desired period of time. Hence, it is also called as term deposit. The deposited money keeps on multiplying as the customer receives rate of interest as per decided by the bank (Rate of interest is high for fixed deposit account than other accounts and may varies from bank to bank).
  • Gold and Silver- Investment in metal especially gold is considered very beneficial. Gold is something that will always remain precious no matter which time period we are. Thus, investment on gold is bound to give good returns on your investment
  • Real estate- Investing in properties is not a bad idea. Population is ever increasing, so the demand for land will also increase in the long term for setting up of industries, hospitals, schools and residential projects. The price of land always increases after few years. In fact, people who bought land in the outskirt of cities 5-10 years back have experienced dramatic price rise in the recent years.