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Home Insights & Advice ULIP vs PPF vs MF which is a better investment option?

ULIP vs PPF vs MF which is a better investment option?

by John Saunders

Why do people find it necessary to invest their money today?

The financial security is of major concern today. The investment options provide the much-needed security to its customers for a long period; it is what attracts them to the idea indulging in it. But what is the right place to invest securely and efficiently? Let us understand the three most popular types of investments before determining the best of them all.

Unit Linked Insurance Plan

ULIP is a combination of insurance and investment, where the policyholder pays a premium. Where a part of the premium is given for secure life insurance the remaining is invested like that of a mutual fund. Throughout the term of the policy, the policyholder goes on investing and accumulating the units.

ULIP investors have two options—equity and debt.  Equity-oriented fund option is more suitable for aggressive investors, whereas debt option is the best for conservative investors.

To note, the recently launched options are far better than the older ones concerning lower charges. When you compare and consider a traditional insurance plan, it offers only four to six percent returns. Whereas, the best unit linked insurance plans can offer an individual double-digit return if they are invested in equity funds.

The subscriber also has an option of withdrawing the funds. There are three possible ways to do so:

  • Death of policyholder: The sum assured is not the only return the family of the policyholder gets; they also receive the returns that are generated through the investment. It is, however, important to remember that the returns in the eventuality of the death of the policyholders are tax-free.
  • The maturity of policy: On maturity, the policyholder is eligible to get higher than the assured benefit or of the value of an investment through the unit link. The maturity returns, in this case, are exempted of tax under section 10D of the Income Tax Act. In the case of mutual funds, this is not possible as the returns are taxable.
  • Partial Withdrawal: The subscriber cannot withdraw any amount before 5 years of the policy. Moreover, the age of policyholder must be 18 years or more. It is extremely essential to bear in mind that every partial withdrawal will result in bringing down the sum assured of policy. However, certain policies provide a fixed number of withdrawals, but after the exhaustion of those chances, every withdrawal is charged a fee. Hence, it is generally wise to avoid partial withdrawal of the amount.

Public Provident Fund

The PPF works as a savings and tax-saving instrument. Small savings are mobilized in this scheme as it offers an investment with judicious returns along with income tax benefits. As per the eligibility criteria, only Indian citizens are entitled to tax-free returns from PPF.

When the PPF reaches its maturity, the subscriber has three options.

  • Complete withdrawal

As per the rules, a PPF account can be closed only upon maturity; the term is 15 years. In the event of such maturity, the complete amount in the PPF account, as well as the accrued interest, can be withdrawn for free and the account can be closed.

  • Extend the PPF account with no contribution

Instead of closing, in the subscriber wants to extend after completion of 15 years, they don’t need to put any amount. The subscriber can withdraw any amount from the PPF account with the restriction that only one withdrawal is permitted in a financial year. The rest of the amount continues to earn interest.

  • Extend the PPF account with a contribution

The subscriber can put money in their PPF account even after extension and can only withdraw a maximum of 60 percent of the amount in their PPF account within the entire 5 years block. However, a single withdrawal is permitted every year.

PPF also has a nomination facility that allows the subscriber to name one or more people.

Mutual Funds

An individual can form a mutual fund by collecting from various investors for investing in company stocks. This is collectively shared by thousands of investors and manages to collectively earn the highest possible returns. The person who is usually driving this investment vehicle is called the Professional Fund Manager.

One has the facility to redeem their mutual funds through online or offline methods. It can be accomplished on any business day through a convenient method.

Comparison between ULIP, Mutual Funds, and PPF

Unit Linked Insurance Plan is a mixture of insurance benefits and investment benefits of its subscribers. Mutual funds, however, offers a worthy amount of wealth creation, but it lacks life protection cover. Also, where other conservative options like PPF offer wealth creation, but again, life protection is missing. PPF can hardly generate enough return to match the increase over the long term.

ULIP – Better Investment Option and Why

ULIP is like a plug-in between wealth creation and life protection cover. A small amount from ULIP premium goes to secure life insurance cover, but the rest of the money is instead invested in funds. Under section 80C, to claim the deduction, one must note that the paid premium for ULIP should not be more than 10 percent of the sum assured amount. For instance, consider that 2 lakhs of ULIP premium is paid and the sum assured amount of ULIP is rupees 15 Lakh. In that case, only rupees 1.5 Lakh will be allowed as a deduction.

The most noted benefit of ULIP is that an individual can choose asset class as they desire. Mutual fund lacks this option as they have their own set of the strategy of investment and that cannot be modified.

Also, ULIP requires a minimum lock-in period of 5 years.

When comparing the three, PPF generates the least return and lacks life protection. Where Mutual Funds provide greater returns in comparison with PPF, life protection is again missing. Therefore, ULIP is the most desirable option with its benefit of wealth creation as well as life protection cover, providing the subscriber with the best of both worlds.

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