What is the Difference Between ULIP and SIP?

source: labourlawadvisor

Insurance and mutual funds are the two most preferred investment vehicles. One gives you financial security for unfortunate events, and the latter lets you build wealth by taking advantage of market fluctuations. However, there are some plans that offer combined benefits of insurance and wealth accumulation. 

In this article, we will help you decide which can be a better option for you, ULIP or SIP. Let's look at this detailed guide on ULIP vs SIP.

ULIP, short for Unit Linked Insurance Plan, is one of those rare investment plans which combine insurance and investment. By primarily investing in market-related securities, these plans aim to generate capital gains for the investors while offering insurance benefits at the same time.  You can pay the premium monthly, quarterly or yearly.

In case of the policyholder's untimely death, the beneficiary receives the sum assured or return on their investment, whichever is higher. If the policyholder outlives the tenure of the ULIP, he/she will receive the fund value.

A Systematic Investment Plan (SIP) is a mutual fund investment tool which promotes a disciplined investment approach. This plan will let you invest a predetermined amount periodically, which promotes regular savings habits and eliminates the hassles of tracking market fluctuations.

You can invest in a mutual fund of your choice and start investing with an amount as little as    ₹500. You can invest monthly, quarterly, yearly or half-yearly. Also, even a small investment made via SIP can grow into a sizable amount with the power of compounding.

SIP investment is usually recommended for salaried and first-time investors who may not have access to a lump sum amount.

Both ULIP and SIP invest in market-related securities, and returns from investments are totally subjected to market fluctuations. The only remarkable difference between these two is that ULIP provides life cover while SIP does not. Hence, if you are investing in a mutual fund scheme via SIP, you will be required to purchase an insurance policy for life cover separately.

Both ULIP and SIP have their benefits and drawbacks. Hence, it entirely depends upon the investor and what they want out of their investment which will work out the best for them.

For example, if you have bigger financial plans in the future, such as children's education, marriage, etc., you might find ULIP to be a better option. In this way, your dependent's future stays secured even in your absence. Also, the returns are free of tax implications.

But if you are looking for high liquidity and wish to generate compounded returns against your investments, investing in a mutual fund via SIP might be a better option. With SIP investment, you can meet both your long and short-term financial objectives.

Financial requirements differ from one investor to another. Hence, it is ideal to assess certain points before going ahead with a ULIP or SIP mutual fund investment.

You should consider the following factors before investing in either SIP or ULIP: 

• Your investment objective and horizon. 
• Your risk appetite 
• Liquidity requirement 
• Tax benefits you can avail from the plans
• Your need for insurance coverage. 

That was all about ULIP vs SIP. As investment avenues, both ULIP and SIP offer a set of lucrative benefits. Both help us build wealth over time; however, ULIPs offer the added benefit of an insurance plan. Make sure to assess your financial and insurance requirements before opting for a ULIP or SIP.