Let us begin by understanding ULIP i.e. Unit Linked Insurance Plan and SIP i.e. Systematic Investment Plan. It will help you to decide where to make an investment of your hard earned money.
The first ULIP investment was launched by UTI (Unit Trust of India) in the year 1971. SIP is a form of investment scheme by mutual fund companies. The mutual fund was also launched by UTI in 1963. These financial instruments help you to meet your short term or long term goals.
SBI Mutual Fund became the first non-UTI mutual fund in India in 1987. Later on, Canara Bank and Punjab National Bank also established their own funds. By means of SIPs you can invest small amounts of money in mutual funds. You can invest money quarterly, monthly or weekly.
ULIP investment gives you triple benefits all under one integrated insurance plan. This investment is useful for wealth creation, life insurance, and tax savings. SIP develops the habit of regular savings and protects your money from ups and down in the market.
Let us understand the important characteristics of ULIP
Liquidity
Liquidity means the ease of converting your investment into cash and at the same time the price of the investment made is not affected price of the investment made. The length of time during which you are not allowed to end or change a financial arrangement most of the ULIP investments is from three to five years. The investor can withdraw fully or partially after the lock in period.
Transparency
Transparency means the investor has ready access to required financial information about a company. There is transparency in ULIP investment regarding all the charges, price levels and audited financial reports. This helps all market participants to base their decisions on the same data leading to reduction of price volatility.
Control
ULIPs policyholders have a great control both over their deposit and the life insurance in one single plan. You need not pay more money if you wish to change the investment from debt fund to equity fund and from equity fund to debt fund
Your Investment is Secure
ULIP investment not only gives the investor insurance cover but also an opportunity to generate wealth. This is done by depositing money in the equities or shares. ULIP investment is considered as a good way for investing for people, who wish to increase their money with low-risk.
Tax Exemption
ULIP investment also offers benefits under section 80C on the income tax apart from investment opportunities and insurance coverage. You need not pay tax for the premiums you paid if you invest in ULIPs.
Mitigation of Risk
Your investment is deposited in various funds which have very less risk under ULIP investment. Therefore your investment is secure as there is very less risk.
Flexibility
You can enjoy ultimate flexibility with ULIP investment. You can pick your life cover. According to your budget, you can make changes to the premiums. According to the risk you want to take you can even pick the fund.
Let us now understand the important features of SIP
Regular savings
You can invest small amount regularly. Investing small amount regularly will lead to exponential growth of wealth.
Duration of SIP
You can fix any tenure of the SIP. It starts with one year. You can also fix your SIP for 3 years, 5 years or more according to your goals.
Invest a fixed amount
The amount you invest in the SIP remains the same throughout the tenure you choose.
Amount debited from your bank account
The fixed amount is deducted regularly directly from your bank account on a given date.
Let us now see what all are the benefits you reap when you invest in ULIP and SIP.
Let us begin with the benefits of ULIP investment
Returns are Linked with the Market
If you deposit your money in ULIP then you get to earn returns linked with the market. A part of your paid premium is deposited in market-linked investments.
Benefits of Insurance and Investment
You will be happy to reap three times benefit of insuring your life, create wealth and also save tax when you make ULIP investment.
Tax Benefits
When you invest in ULIP under Section 80C of the Income Tax Act you can avail tax exemption benefits for a maximum of Rs. 1.5 lakh.
Death Benefits
If the ULIP investor dies during the term of the policy then death benefits are given by ULIP. The sum assured and the fund value are the death benefits. Depending on the reason for the death of the investor the death benefits vary.
Maturity Benefits
At the end of time of maturity the insured survivor receives maturity benefits from ULIP. Usually, maturity benefit is total money of value of the fund. Depending on the rules and regulations extra benefits are also provided by the insurance provider.
Benefits of Long Term Investment
ULIP investment is good if you want to invest for many years. You get high return if you invest for many years. The ups and downs of the market can increase or decrease the returns if you invest for a short time. Hence investing for many years can help you to earn higher returns.
Withdrawal Benefits
The answer to your financial problems is ULIP investment. If there is an emergency you can withdraw some amount from your investment. You can withdraw after the pre-specified time limit. The withdrawal money is tax free.
Now let us look at the benefits of SIPs:
SIP is not a burden on your pocket
You can invest small amounts regularly (every day, every month or every three months) in SIP. This way you need not take out a large amount from your account in bank to invest at one time.
You can begin your investment in mutual funds with a small amount of rupees five hundred every month. So, don’t worry if you cannot invest a huge sum or thousands of rupees in one go. SIP helps you to overcome this hurdle.
SIPs make market timing irrelevant
You need not worry about market volatility by investing in SIP. Sometimes market timing can lead to loss of the investment you made causing tension. But if you select and invest in a good mutual fund then it can create lots of wealth for you.
If you invest for a longer period, then the equities generate more wealth than gold, real estate or debts. Long term investment counters the inflation in the market.
If you invest in the wrong stock or mutual fund in wrong time you can face losses. But SIP in a mutual fund with a steady track record can solve these problems.
SIPs enable division of total investment
Often SIP gives better results in comparison to lump sum investing. The reason for this is the rupee cost averaging. Under this you would probably buy more mutual fund units when the prices are low. Also you would buy few mutual fund units when the prices are high. Since you are investing and other investors are exiting the market you are disciplined.
The power of compounding is benefit of SIPs
The money you invest regularly in SIP gets compounded. This means, when you start investing in a SIP of Rs. 2000 in this fund for a period of 20 years and want a return of 15% p.a., your investment would be approximately 30 lakh.
For goal planning SIPs are very effective
Different people have different goals to achieve in their life. Some want to buy a house, others want to buy a car, still others want to provide good education to their children or getting their children married or it could be even their own retirement. These goals can be achieved by investing in SIPs as soon as it is possible.
An individual may either go for SIP or for ULIP investment depending on your risk appetite, needs and goals
Invest in SIP:
- When you are looking for returns in short or medium term
- When you want to easily convert your investment into cash
- When you have already invested in a term life plan to protect your family financially
Make ULIP investment:
- When you want a long term investment plan
- When you want both life cover along with investment so that you can provide financial support to your family in case of unfortunate happenings.
- When you want to invest so as to help you in saving tax
Debate: ULIP vs SIP
The debate regarding ULIP investment vs. SIP has caught the attention of Indian investors. Both ULIP investment and SIP are very popular and sought-after amongst investors. Both Unit-linked insurance plans and SIPs are disciplined investment options. Both of them offer opportunities for wealth creation in a pre-stipulated period of time.
Let us now see the differences between ULIPs and SIPs
Type of Investment
ULIP – Investment + Life Insurance
SIP – Investment
Tax Benefits
ULIP – All ULIP plans
SIP – Only with ELSS
Life Cover
ULIP – Yes
SIP – No
Switching Option Available
ULIP – Yes
SIP – No
Death Benefit
ULIP – Yes
SIP – No
Regulator
ULIP – IRDAI
SIP – SEBI
Lock in Period
ULIP –5 years
SIP –3 years
Fund Management Charges
ULIP – 1.35%
SIP – 2.50%
Unit-linked insurance plans have comparatively more advantages when they are compared to SIP.
