To create a future financial cushion, you need to consider two points. Firstly, you need to choose an investment plan that gives stable and safe returns. Secondly, you need to invest a portion of your income regularly, and from an early age, to meet both short and long-term goals.
Unit Linked Insurance Plans (ULIPs), and Systematic Investment Plan (SIP) are 2 such viable investment options. But which is better? Here is a detailed comparison for you to make an informed decision.
Type of Instrument
ULIPs are life insurance cum investment plans. SIPs are pure investment vehicles that put a specific amount in a chosen mutual fund at regular intervals.
ULIP plans offer tax benefits u/s 80C and 10(10D) of the Income Tax Act, whereby you can save up to Rs. 46,800 with premiums and avail tax exempted returns. You can get similar tax benefits in SIP if you invest in ELSS (Equity Linked Savings Scheme). However, ULIPs provide the triple advantage of wealth generation, life insurance cover, and tax benefits.
In SIP plans, no life cover is paid to the nominee of the policyholder after his/her death. However, in ULIPs, life insurance is paid out to the family members in case of the policyholder’s demise.
ULIPs have a lock-in period of 5 years, after which you can start partially withdrawing your funds. In SIPs, this liquidation can be done anytime, except for ELSS funds that have a lock-in period of 3 years.
Equity vs. Debt Instruments
In SIPs, investments are majorly done in the equity market. But in ULIP plan, investments are spread across equity and debt instruments, therefore leading to more portfolio diversification. You can choose the proportion based on your risk appetite and to avoid market volatility.
ULIPs are life insurance policies, with an investment component. This means that investors can ensure financial protection for their family’s future, no matter what. The investment component doesn’t have a link with the sum assured. However, in SIPs, returns depend on the market performance. So, it has a higher risk compared to ULIPs.
Which to Choose?
Both ULIPs and SIPs have their advantages. Both inculcate a habit of disciplined savings. If you want to just concentrate on wealth generation, that beats inflation in the long-term, you could invest in SIPs. However, with ULIPs you get the added protection of life insurance. Do consider all the pros and cons to make your decision!