What should you choose - Unit Linked Insurance Plan (ULIPs) or Mutual Funds?

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ULIP
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What should you choose - Unit Linked Insurance
Plan (ULIPs) or Mutual Funds?
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• In terms of structure and functioning, ULIPs as
  an investment avenue compares well with mutual
  funds. Just like mutual funds, the insurance
  company allots units to its ULIP investors and a
  net asset value (NAV) is declared on a regular
  basis. Along with that, ULIPs have the liberty to
  invest across assets just like mutual funds.
• Of course, to say that the two are similar except
  for the insurance is simplistic. Despite all the
  similarities, there are several factors that set
  them apart. We evaluate the two avenues on the
  most critical parameters to see how they measure
  up.

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• Ease of investment
• Investors have greater flexibility while
  investing in a mutual fund. In most cases they
  can start small with as little as ? 500 a month
  for as short a horizon as 12 months. This feature
  known as SIP i.e. Systematic Investment Plan,
  proves to be affordable for just about
  anyoneeven college students and is a great way
  to start saving for a goal. An investor once he
  commits to an SIP can discontinue midway without
  any penalty or financial implications and his
  investment remains intact.

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• ULIPs on the other hand are more structured in
  that sense. The insurance advisor will assess
  your income, your financial responsibilities and
  will draw up an investment plan, which will
  entail paying a fixed premium for a minimum of 5
  years. If the individual wants to exit the ULIP
  before the minimum investment tenure, there is a
  financial implication and he stands to lose part
  of his premium. Needless to say, investing in
  mutual funds is easier and embraces a larger
  segment of the investor community.

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• Expenses
• As determined by the Securities and Exchange
  Board of India (SEBI), expenses charged by mutual
  funds to investors for a range of activities like
  fund management, sales and marketing,
  administration are subject to certain limits. For
  example, equity-oriented funds can charge
  investors a maximum of 2.25 per annum for all
  expenses if it exceeds the limit, the expenses
  will be borne by the fund house instead of
  investors.
• The Insurance Regulatory and Development
  Authority (IRDA), the regulator for insurance
  companies, also prescribes limits on certain but
  not all ULIP expenses. The most expensive part
  about ULIPs is the high-premium allocation charge
  usually not exceeding 10 of premium. This was
  even higher before IRDA clamped down to eschew
  mis-selling in ULIPs.

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• Portfolio disclosureBased on SEBI guidelines,
  mutual funds are expected to disclose their
  portfolios on a quarterly basis, although most
  disclose them monthly as best practices. This
  gives investors a chance to study their portfolio
  and figure out where and how their money is
  working for them.ULIPs are also required to
  disclose their portfolios on a quarterly basis
  and like mutual funds many choose to do so
  monthly for greater transparency.
• Tax benefitsUnder Section 80C of the Income Tax
  Act, premium on ULIP investments are allowed as
  deduction from income upto a limit of ?100,000.
  Likewise ULIP proceeds are tax-free in the hands
  of investors under Section 10 (10D). There are
  detailed guidelines on the percentage of the ULIP
  premium eligible for tax benefit.

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• As far as Section 80C is concerned, only Equity
  Linked Savings Schemes (ELSS) qualify for tax
  benefit. So investments upto a maximum of
  ?100,000 in ELSS are allowed as deduction from
  income. ELSS proceeds are not tax-free in the
  sense that they attract Securities Transaction
  Tax (STT) on redemption. Non-ELSS mutual funds
  have varying tax implications on redemption
  depending on the nature of the mutual fund viz.
  equity-oriented, debt-oriented,
  money-market/liquid fund.
• There isn't a clear winner. Both ULIPs and mutual
  funds have their benefits and investors should
  ideally consult their investment advisors before
  making an investment.

Source http//www.dnaindia.com/lifestyle/report-w
ealthy-wednesdays-what-should-you-choose-unit-link
ed-insurance-plan-ulips-or-mutual-funds-2058047
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