It is every parent’s objective to secure his or her child’s financial future. So, it becomes essential to invest in financial plans that help amass significant wealth over time.
However, planning for a child’s future is not as easy as you might think. You are already competing to become professionally successful. Moreover, you need to ensure that you have adequate funds post-retirement to meet your daily and lifestyle-related requirements. Therefore, it becomes imperative to invest in a plan that provides financial protection and a good return on investment. Unit-Linked Insurance Plans (ULIPs) and mutual funds are two worthwhile options that can give a better return among other investment avenues.
Understanding ULIPs and mutual funds
Knowing the difference between ULIPs and mutual funds is essential before ascertaining which instrument is a better bet.
What are ULIPs?
While searching for the ULIP meaning on the Internet, you will understand that this financial tool is a mix of life insurance and investment. In the case of a ULIP, the insurer invests a part of the premium that you pay in equity and debt funds to meet your long- term financial goals.
What are mutual funds?
Mutual funds are another popular financial tool wherein the money collected from numerous investors is invested in the equity market and a variety of debt instruments. It provides an opportunity for investors to gain access to diversified portfolios that are managed by professional companies.
ULIPs vs. mutual funds – Which is a better option?
Both instruments have a common motive of maximizing the returns on investment. A ULIP investment is an ideal option if you wish to stay invested for a long tenure. Here are some crucial factors as to why ULIPs score over mutual funds.
- Purpose of the investment
Mutual funds do not provide life cover, but ULIPs do. By investing in a ULIP, you can secure your family’s monetary future in case of any untoward incident. Moreover, you can earn substantial returns on investments.
- Supplementary protection
ULIP investment is ideal if you want to generate wealth to meet a specific purpose in the long run. Search for the ULIP policy that offers additional protection in terms of riders. For instance, if you are saving for your child’s higher education, but are worried that you may be unable to accomplish your financial objective in case of an unfortunate event. Some insurers offer ULIPs that provide an assured lump sum during an unforeseen circumstance to meet these goals. Moreover, some insurers waive the premium and the family receives a stable income during the policy duration.
- Returns on investment
When it comes to long-term investments, ULIPs provide higher returns as compared to mutual funds. This is because you can reap the benefits of compounding. Here, the amount earned is re-invested to create wealth over time. Investing in equity mutual funds can result in higher returns, while debt mutual funds give low returns. Moreover, ULIPs provide the option of switching between equity and debt funds. You can remain invested for a long period in equity funds, and when you get closer to a goal, like your child’s higher education, you can switch to debt funds. Mutual funds do not offer this flexibility.
- Tax savings
According to Section 80C of the Income Tax Act, 1961, investment in a ULIP policy is eligible for an income tax deduction of up to INR 1.5 lakh per year. In contrast, you are only eligible for a tax deduction if you invest in the Equity-Linked Savings Scheme (ELSS) mutual fund.
Factors to consider before investing in a ULIP
It is always advisable to determine your long-term financial goals before selecting a ULIP. Here are some useful tips to consider:
- Understand the scope of investment
- Review the charges involved
- Assess your risk-taking capability
- Consider your investment horizon
The risk involved in mutual funds is considerably high when compared to ULIPs. A ULIP gives you a chance to create a well-balanced combination of equity and debt funds where the risk is manageable. Moreover, it provides monetary security in the form of life insurance to take care of your family members in your absence. Therefore, ULIPs are a much more suitable investment option if you wish to save for your child’s future.