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ULIP vs. SIP

While planning your goals, you realise that keeping money in the bank or instruments like Fixed Deposits (FDs) cannot provide returns. The interest rating is so low that it cannot match rising inflation. Being unsatisfied with the traditional instruments has led to people searching for more lucrative options. Since most individuals still live a paycheck-to-paycheck life in the country, several turned towards recurring investment options. The shift amongst the people leads to an increase in the popularity of new-age recurring investments like ULIPs and SIPs. If you are confused about which one to invest in, here is a comprehensive comparison between both:

Difference between ULIP And SIP

What is a ULIP policy?

Unit Linked Insurance Plan (ULIP) is a product that offers life insurance and investment in a single plan. Similarly, for any other life insurance, pay premiums for your ULIP. However, here they are used differently compared to pure life insurance. The premiums you pay are partly allocated towards providing you with a life cover and partly invested in funds of your choice. ULIP benefits are dual since the policyholder protects their loved ones financially with the life insurance component. The investment component ensures that they receive returns on their investments and generate wealth. The policyholder gets to choose the funds they want to invest in based on their risk appetite.

What is a SIP?

Once you understand what a ULIP policy is, it is important to know the meaning of a SIP before comparing the two. A systematic Investment Plan (SIP) is a way of investing in mutual funds. It is a pure form of investment and does not provide any dual benefits as a ULIP does. When you buy a SIP, you are investing in a mutual fund in a recurring manner. The frequency of the payment can be weekly, monthly, quarterly, or even yearly, depending on the investor’s flexibility. You can choose the mutual funds you want to invest in based on your risk appetite and financial goals.

ULIP vs. SIP

After understanding the meaning of ULIP and SIP, it becomes easier to understand what makes them different from each other. Here are key factors where they are completely different:

Purpose

ULIP is a product that provides life insurance and investment opportunities in a single plan. SIPs provide investment opportunities only.

Flexibility

Depending on the risk appetite of the investor, both ULIPs and SIPs offer several fund options to choose from. Equity funds are preferred by investors with a high-risk appetite, while debt funds are preferred by investors with a low-risk appetite. For those who want to take moderate risks, hybrid funds are also available. However, the key difference between the two is the flexibility offered during investment.

When you invest through a SIP, you cannot switch the fund allocation if you are unhappy with your fund’s performance. You either have to withdraw your funds completely or stop the further payments. One of the ULIP benefits that surprise investors is that you can switch your fund allocation anytime you want. If you are unhappy with how your funds are performing, you can simply switch from debt to equity or vice versa. Since both SIPs and ULIPs are market-linked investments, their returns are subjected to market volatility. The advantage here for ULIP holders is that they can simply switch their fund allocation and maximise their benefits in a volatile market.

Additional benefits

SIP has investment opportunities with no add-on benefits. While a ULIP provides life insurance to the policyholder along with investment. It fulfils two major financial needs of an individual in a single plan.

Tax benefits

The unique structure of ULIP allows it to provide tax benefits to the policyholder on multiple levels. The premiums you pay for it are eligible for tax deductions, while the maturity amount you receive is also subjected to tax exemptions. With SIPs, there are no tax benefits offered irrespective of which funds you invest in except the Equity-linked Savings Scheme (ELSS).

There is no obvious choice between ULIP and SIP since both serve different purposes. It depends upon your needs and the financial goals that you can choose between the two.

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