ULIPs vs. Mutual Funds

The opening of the insurance sector has seen a deluge of innovative products, which have provided excellent flexibility, returns and insurance benefits. Coupled with this the equity market has given tremendous returns.
Today there is a debate revolving around choosing between ULIPs and Mutual Funds. Each of these avenues of investment have their positives and negatives.

ULIPs – Advantages
• Flexibility- you can choose your term, insurance cover.
• Transparency – you know the amount you are paying for various benefits.
• Tax free returns – 100% tax free since they are received from insurance.
• One can switch between various options and tax benefits when investing under Sec 80C.
ULIPs – Disadvantages
• Flexibility can act as a disadvantage since the person may use the withdrawal clause too early.
• Heavy initial cost – you pay around 15-20% for the first year and then around 5% for the next two years.
• No control on costs.
• One may try to time the market and may make errors.
Mutual Funds – Advantages
• Lower cost of entry- you can start with as low as Rs. 500.
• Choice of various sectors – one can choose a fund as per requirement.
• Tax free returns – under long capital gains for equity funds and tax benefits under Sec 80C for selected funds.
Mutual Funds – Disadvantages
• No control of costs.
• Recurring costs are higher.
• The capital gains rule can change the taxation part and only equity funds qualify for tax benefits.