A Brief Overview
Investments are made keeping in mind varied goals that differ based on the investor in question. Two investment forms that are frequently flocked to are Unit Linked Insurance Plans (or s) and Mutual Fund Systematic Investment Plans (or SIPs). Read on to understand the differences between the two.
Serving the dual purposes of insurance and investment, ULIPs invest in stocks and bonds capable of generating returns keeping in mind the prevailing market conditions. Those that support in ULIPs do so as they allow for wealth creation over long periods. They allow for the fulfillment of long-term financial goals that include funding a child’s education or marriage.
Predetermined premiums must be paid to invest in a ULIP which can be asked for monthly, quarterly, or yearly. These premiums are invested in a wide array of instruments, including stocks and bonds. The performance of the market alters the value of the fund. Should the policyholder die while the policy is active, their beneficiary is paid the fund value or sum assured – whichever is higher. Else, the available fund value is produced when the plan matures.
Understanding Mutual Fund SIPs
Mutual funds are popular investment options wherein money paid by investors is pooled into a fund which is collectively used to invest in a variety of instruments based on the choice of the fund manager who is responsible for managing the fund. Mutual funds exist in various formats (equity mutual funds, debt funds, hybrid funds), and their mode of payment may vary, i.e., they may exist as SIPs or prices can be made in a lump sum.
SIPs allow investors to invest in a fixed amount directed to the mutual fund of their preference regularly. The installment required to be paid can be as modest a sum as INR 500. The frequency with which these installments are required to be paid can vary and can range from a weekly to yearly basis. SIPs are ideal for first-time investors as they are flexible. Investing in a SIP is viable as it allows investors to meet their financial goals and accumulate a corpus over a long-time frame.
As established in the previous two subheadings, each investment tool has its benefits when considering this argument. However, they do differ on several parameters.
- Investment Goal – For starters, ULIPs serve the investment and insurance goals, whereas SIPs only serve investment goals.
- Investment Tenure – Next, investment tenures for ULIP require premiums to be paid, keeping in mind the term for the plan, whereas SIPs don’t have a fixed tenure and are invested in so long as the investor desires.
- Lock-in Period – Lock-in periods applicable for ULIPs amount to 5 years, whereas they are three years for SIPs.
- Charges – ULIPs involve multiple accounts ranging from premium allocation and fund management fees to administration and mortality charges. Conversely, SIPs only have entry and exit load charges which are applicable in limited cases.
Investors must consider their financial profiles before considering which investment tool works best for them. To have a more comprehensive understanding of the differences between the two forms of investment, head on over to Finserv MARKETS.