Comparision of ULIPS vs MFS (India)

Below is a brief comparision of ULIP (Unit Linked Insurance Product) vs MF (Mutual Funds) specific to the Indian market.

Primary Objective
MFs : Investments
ULIPs: Protection + Investments

Investment Duration
MFs: Works out for Medium term, Long Term Investors. Risky for Short Term investors.
ULIPs: Works out for Long Term Investors only.

Flexibility
MFs: Very flexible. Plenty of scope to correct your mistakes if you made any wrong investment decisions. You can easily shuffle your portfolio in MFs.
ULIPs: Flexibility is limited to moving across the different funds offered with your policy. Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to an other ULIP of a different fund house can be expensive.

Liquidity
MFs: Very liquid. You can sell your MF units any time(except ELSS). Some MF's like those from Reliance have introduced redemptions at ATMs.
ULIPs: Limited liquidity. Need to stay invested for the minimum number of years specified before you can redeem.

Investment Objective
MFs: MF's can be used as your vechile for investments to achive different objectives.(Eg: Buying a car three years from now. Downpayment for a home five years from now. Childrens education 10 years from now. Childrens marriage 15 years from now. Retirement planning 25 years from now. Medical expenses after retirement 25 years from now)
ULIPs: ULIPs can be used for achieving only long term objectives (Chidrens education, Childrens marriage, Retirement planning)

Tax Implications
MFs: All investments in MF's don't qualify for section 80C. Only investments in ELSS qualify for 80C.
ULIPs: Provide Tax Benefits under section 80C.
MFs: Returns on equity MF's are exempt from long term capital gains tax. (Unless tax laws change in the future).
ULIPs: We are moving from EEE to EET. No clarity if ULIPs will be taxed under EET.
MFs: Tax liabilities when moving across from debt to equity funds.(Returns from debt MF's are taxed.)
ULIPs: Very flexible in moving between equity and debt funds(not tax implications until maturity of the policy).

Strings Attached(fine print)
MFs: None so ever. At most you pay a small exit load if any.
ULIPs: Some strings attached for your policy to be in effect. Minimum number of premiums need to be paid. Minimum fund balance need to be always maintained. (I personally donot like policies which say pay three years premium and get insurance cover for the next 25 years since there are a lot of ifs and butts involved. A lot of assumptions made and nothing is in your hand, it could turn out your fund balance might be exhausted after just 12 years of insurance cover).


ADVANTAGES ULIPS

1. Can easily rebalance your risk between equity and debt without any tax implications.
2. Best suited for medium risk taking individuals who wish to invest in equity and debt funds(atleast 40% or higher exposure to debt).
3. No additional tax burden for those investing mainly in debt unlike in MFs.

ADVANTAGE MFS

1. Better returns than ULIPs.
2. Lower charges than ULIPs.
3. Very flexible and enables you to switch your investments from non performing MF's to better performing MFs
4. Very Liquid can be redeemed at anytime.
5. Best suited for medium to high risk taking individuals who wish to invest a significant portion in equity funds(atleast 65% exposure in equities).