The reasons people prefer mutual fund investments these days is because they are considered to carry a diversified portfolio. What asset management companies do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. The money is invested in accordance with the scheme’s nature, its goals and depending on the risk profile it carries. Those seeking long term capital appreciation through market linked schemes generally prefer investing in mutual funds.
ULIPs (short for Unit Linked Investment Plan) on the other hand is an unique insurance policy that gives investors an opportunity to generate income through investment in mutual funds. ULIPs come with a lock-in period of 5 years. Investors cannot withdraw or redeem their ULIP investment amount for a period of 5 years. Once the policy matures, investors have the option of redeeming the investment amount or they can remain invested for another 5 years.
However, ULIPs offer insurance along with potential long term capital appreciation, investments in equity mutual funds is still a better option. Here’s why:
Equity mutual funds do not have a lock in period
One does not need to remain committed to their equity mutual fund investments. Except for ELSS which comes with a three year lock-in period, other equity funds do not come with a lock-in period. Investors are free to invest or withdraw from their equity fund investments at their own will. This provides liquidity to the investor’s portfolio which is not possible with ULIPs. ULIP investments cannot be withdrawn before the maturity period, thus providing zero liquidity.
Equity mutual funds have SIP investment option
ULIPs only have lumpsum investment options. Which means investors have to pay their entire investment amount right at the beginning of the investment cycle. Because of this, your ULIP’s entire mutual fund portfolio is exposed to market volatility. On the other hand, equity mutual funds offer the option to start a SIP. Systematic Investment Plan or SIP is an easy and convenient way to invest in equity. Like ULIPs, investors do not need to have a large investment amount to start a SIP in equity funds. They can invest small fixed amounts at regular intervals instead of making a lump sum investment. The small amount which they choose should meet the minimum investment requirements mentioned by the equity fund in their offer document. Investors can also refer to an online SIP return calculator to get a rough estimate of the expected corpus at the end of the SIP investment tenure.
Equity mutual funds offer multiple withdrawal options
If you are investing in equity funds with the long term objective of wealth creation then you can choose for the growth option. In a growth equity plan, the profits and income generated by the scheme are invested back in the fund. In the long run, this may cause the NAV of the fund to appreciate in value. Also, reinvesting offers the benefit of compounding and with the increase in the value of the fund’s NAV investors with a long term investment horizon can benefit from a growth plan. However, if you are investing in an equity fund to seek regular income, then you can select the dividend plan. In a dividend plan, the income generated by the fund is offered to investors in the form of dividends. These payouts are made from the fund’s NAV. The fund managers release dividends only if the fund makes profit.
Equity funds have several advantages over ULIPs. They offer diversification of portfolio, are highly liquid in nature and might also help with long term capital goals. However, since they are mutual funds, equity funds do not offer guaranteed returns. Hence, investors are expected to diversify their mutual fund portfolio with both equity and debt instruments depending on their risk appetite.