With so many investment options accessible, it can be tough to select one that matches your objectives and works best for accumulating money while providing the highest returns. It can be more difficult to make a decision when there are many conversations over which is better: ULIP vs. Mutual Fund, SIP vs. FD. If you’re not sure which investment option is ideal for you, we’ll walk you through some of the most popular options and help you make the right decision between mutual funds, ULIPs, SIPs, and fixed deposits.
Benefits of ULIP, Mutual Funds, SIPs and Fixed Deposits
Unit-Linked Insurance Policy (ULIP):ULIP is a one-of-a-kind investment plan and one of the preferred NRI Investment Plans as it provides both investing and insurance coverage in one plan. This enables you to receive market-linked returns through investment and insurance coverage.
Advantages of Investing in ULIPs
- Comprehensive coverage: ULIPs offer a combination of wealth creation, tax benefits, and life insurance coverage. A portion of the premium goes towards providing you with life insurance coverage and the rest of the amount is used to invest in other market instruments such as stocks, shares, and bonds. It also provides tax benefits under Section 80C of the Income Tax Act of 1961.
- Partial Withdrawal: ULIPs require a 5-year lock-in period, after which you can withdraw a portion of your funds as needed.
- Selection of Assets: Depending on your risk tolerance, you can invest and allocate your money in investment vehicles such as life equities, stocks, and debt funds.
- Death Benefit: A ULIP gives death and maturity benefits to the policyholder. In the event of the policyholder’s demise, the death benefit is given to the nominee or beneficiary.
Mutual Funds: A mutual fund is a type of financial instrument in which several participants combine their money to invest in securities such as bonds, money market instruments, shares, and other assets. Professional money managers manage the funds, distributing assets and aiming to generate investment income or revenue for the fund’s shareholders.
Benefits of investing in mutual funds
- Getting liquidity is easy: To meet your financial needs, you can immediately sell mutual funds. After the money is liquidated, it is transferred to your bank account within a few days. On the other hand, other mutual funds make payments more swiftly.
- Diversification: It is one of the most obvious advantages of mutual fund investing. Fund managers typically disperse your investment across stocks from several industries as part of their diversification process. As a result, if one sector fares poorly, other asset classes might make up the difference.
- Professional Portfolio Manager: A mutual fund is a realistic choice for people who do not have the time or ability to do their own research and asset selection. A professional fund manager manages everything and makes decisions about how to invest your money based on your risk tolerance.
- Flexibility in Investment: If you have started investing with a small amount of money, you can invest in an equity fund on a regular basis, perhaps monthly or quarterly. If you have a surplus, you can make a one-time investment into debt funds. Furthermore, there are various sorts of mutual funds. Mutual fund investments can be done in either SIP or lump sum manner. You can select any kind based on your needs and ambitions.
Systematic Insurance Plans (SIPs): A systematic investment plan is a strategy for investing in mutual funds. It is a method of consistently investing a set amount of money in a mutual fund account. There are many types of SIP and you have the option of making monthly, quarterly, or annual payments, depending on your convenience and financial goals. As a result, SIP investing is a safe and flexible financial product with low risk, which is the key distinction between ULIP and SIP. Another reason why ULIP is considered to be a good NRI Investment Plans is the lock-in period, which is three years for SIPs and five years for ULIPs.
Advantages of investing in SIPs
- Begin Small: Start with a small investment fund of ₹500 and then you can gradually increase the amount based on your needs and income growth, with the ability to reap the benefits of compounding over time.
- Habitual Savings: There are many types of SIP and once you select one, it will allow you to save systematically for long-term wealth/asset creation by automatically debiting a predetermined amount from your account.
Fixed deposit (FD): ULIP vs FD has been a popular topic of debate among policyholders and investors. A fixed deposit is a financial instrument offered by banks or non-bank financial firms (NBFCs) that pays a higher interest rate than traditional savings accounts until the maturity date.
The advantages of investing in fixed deposits
- Fixed returns: FD has a predetermined rate of return. When you open a fixed deposit, your interest rate remains constant for the duration of the term you choose. Even if interest rates in the rest of the market decline, your FD interest returns will remain constant.
- Hassle-free Investment: You can open an FD account online or by visiting the bank with an existing savings account. Once the account matures, you can renew it or have the maturity proceeds credited to your account, depending on your option.
- FD & Loan: FD is a secure investment to have on hand for a financial emergency. One can even obtain a loan against a fixed deposit. Depending on the bank, you may be eligible to borrow up to 95% of the value of your fixed deposit.
- Compound Interest: If you choose a Fixed Deposit account with a reinvestment option, you will earn compound interest. Simply said, compound interest is the interest earned on both the interest and the principal sum.
Factors to Consider Before Choosing Between ULIPs and SIPs
From the above-mentioned NRI Investment Plans, ULIPs vs SIPs is what most of the NRIs are interested in. When deciding between ULIPs and SIPs, you must consider the rewards, risk tolerance, and other factors such as the types of SIPs to choose from. Some of the following elements can help you choose between SIPs and ULIPs:
Benefits: One of the primary differences between the two products is that ULIPs provide life protection while SIPs do not. Similar to mutual funds, a part of your ULIP contributions are assigned to an investment pool and to different types of SIP. The insurer collects funds from all investors and distributes them to various funds in an attempt to increase returns. The remainder of the premium goes towards life insurance coverage.
Risk Factor: SIPs are risky investments because they are pure investment products; nevertheless, the benefit of compounding allows you to generate higher returns. However, staying invested for a long time is very important with SIP. However, due to the insurance component, the risk associated with ULIPs is only partially mitigated. To mitigate the negative impact on your invested amount, fund managers move your investment to lower-risk funds.
Fund Management Charges: SIP fund management expenses are approximately 2.5 percent higher than ULIP fund management fees. There are a few additional expenses, such as entry and departure loads and recurring fees. ULIPs, on the other hand, have low fund management fees (1.35%). In contrast, ULIPs charge costs in a variety of categories, including premium allocation fees, administration expenses, and fund management fees.
Bottom line
Every investment is driven by a goal. It is thus critical to assess your financial objectives before investing. You should also consider your loved ones’ future stability when creating an investment plan. As a result, you must evaluate the features of both ULIP and SIP in light of your investment choices. This will aid in making an informed decision.
