What to choose between SIP and ULIP?

Insurance and mutual funds are the most popular forms of investment. While the former provides financial stability in the event of an unpleasant incident and the latter allows you to accumulate wealth by capitalizing on market volatility. However, some plans combine the benefits of insurance with wealth creation. In this article, we'll help you decide which is a better alternative for you: ULIP or SIP.

What is ULIP?

ULIP, or Unit Linked Insurance Plan, is a unique type of plan that combines insurance and investing. These plans generally invest in market-related securities with the goal of creating capital gains for customers while also providing insurance benefits. In this plan, one gets the option to pay the premium monthly, quarterly, or annually. In the event of the policyholder's untimely death, the beneficiary will get the sum assured or the return on their investment, whichever is higher. If the policyholder outlives the term of the ULIP, he or she will get the fund value. Usually, this plan is opted for by those who don't want basic term life insurance and want a return.

What is SIP?

A Systematic Investment Plan (SIP) is a mutual fund investment tool that encourages a disciplined investing style. This plan allows you to invest a predetermined amount on a regular basis, encouraging regular savings habits while eliminating the headache of watching market swings. Invest in your preferred mutual fund with as little as ₹500. You can invest monthly, quarterly, yearly, or semi-annually. Furthermore, the power of compounding allows even a tiny SIP contribution to form into a significant amount. SIP investment is typically recommended for salaried and first-time investors who do not have access to a lump sum.

How are ULIPs different than SIPs?

ULIP

Triple benefits: ULIPs are insurance and investment products in which a portion of the premium you pay is used to provide life insurance coverage. On the other hand, another portion is invested in markets in order to generate profits and wealth. ULIPs provide a triple benefit of life insurance, wealth building, and tax benefits that make this the best investment plan.

Choosing the chosen asset class: ULIPs allow you to select your preferred asset class based on your risk tolerance. If you are a driven investor, you can choose equities. If you are a moderate investor, you can select debt funds. You can switch funds within the ULIP.

Can make partial withdrawals: What makes ULIPs the best investment plan is it allows you to make partial withdrawals after the statutory 5-year lock-in period which isn’t the case with the best investment plan. You can withdraw an amount based on your requirements and goals. Though there are no restrictions on the amount you can withdraw, avoid withdrawing huge amounts, as this may result in policy termination.

SIP

Allows you to form the habit of disciplined savings: SIPs instill the habit of disciplined savings, which is essential for long-term wealth creation and accomplishing different goals. The auto-debit feature deducts a set amount from your account each month and invests it on your behalf.

Can Start with a small amount: The beauty of SIP is that you may begin with as little as Rs. 100. As your income grows, you can gradually increase the amount to build the desired corpus. When you invest over an extended period of time, you get the benefits of compounding. Assuming 12% returns, a monthly investment of Rs. 1,000 over ten years would exceed Rs. 2 lakh.

Protects you against market volatility: Since SIPs spread your investments across time, they protect your portfolio from a substantial dip when the market turns south.

Which is better: ULIP or SIP?

Both ULIP and SIP invest in market-related securities, and investment returns are completely dependent on market swings. The only notable distinction between these two is that ULIP offers life insurance which makes this one of the best investment plan whereas SIP does not. As a result, if you invest in a mutual fund scheme through SIP, you will be required to purchase a separate life insurance policy.

Both ULIP and SIP have advantages and disadvantages. As a result, it is totally up to the investor and what they want out of their investment to choose which option will be the best for them.

For example, if you have long-term financial goals, such as the education of your kids or marriage, a ULIP may be a better choice. In this way, your dependent's future is assured even in your absence. Furthermore, the returns are devoid of tax implications. However, if you are looking for high liquidity and compounded returns on your investment, investing in a mutual fund through SIP may be a better option. SIP investing allows you to fulfil both your long-term and short-term financial goals.

What Factors to Consider When Choosing Between ULIP and SIP?

Financial requirements vary from one investment to another. As a result, before investing in a ULIP or SIP mutual fund, it is best to consider a few factors:

Return on Investment: Returns on investment are an important factor in evaluating the best investment plan between ULIP and SIP. ULIPs, as market-linked investments, have the potential to provide higher returns depending on market performance. However, returns are not guaranteed, and ULIPs may carry a higher risk than SIPs. SIPs are more reliable and provide consistent returns, but they may not generate wealth as quickly as ULIPs.

Liquidity: Liquidity is another crucial consideration when deciding between ULIP and SIP. ULIPs have a minimum lock-in term of 5 years, making it impossible to withdraw cash in an emergency. Some partial withdrawals may be made to cover the policyholder's emergency and higher education needs for children. If you make any partial withdrawals within the lock-in period, the sum assured will be reduced by the amount of the withdrawal. In contrast, SIPs are liquid in nature and do not require a lock-in period. Investors have the option to withdraw their cash in part or altogether at any moment.

Flexibility: SIPs are flexible in terms of the amount invested, whereas ULIPs let you be flexible about your allocation between equities, debt, or hybrid funds based on your risk tolerance and market conditions. Some ULIPs additionally include riders for accidental death, disability, hospitalization, and other benefits to provide a full protection plan.

Costs: The fees payable for ULIPs and SIPs are significantly different. ULIPs include a range of charges such as mortality charges, premium allocation charges, administration charges, and fund management charges, which reduce the corpus that could have been invested for returns. SIPs, on the other hand, have no charges other than the expense ratio, which varies according to the management fee.

At last,

ULIPs and SIPs, both provide lucrative investing opportunities. Both help us accumulate wealth over time, but ULIPs provide the added benefit of insurance coverage. Finally, the choice between ULIP and SIP is determined by an individual's investment needs, goals, and risk appetite. A decision to invest in any of these potential investments should be based on assessing their respective returns, liquidity, expenses, and flexibility. Although there are a variety of expenses associated with ULIPs that might deplete the corpus before giving returns or insurance benefits, it provides both investment and insurance, making it the best investment plan for those who want more from their basic term life insurance. Similarly, SIPs are the preferred choice of investment for low-risk investors because they do not involve lock-in periods. Before investing in either of these options, you must study all of the features and assess the risk and return possibilities.