The choice of investment products depends on one’s investment horizon. I am often flummoxed when people come to me for investment advice, more particularly on which instruments they intend to choose, when they have no clarity on investment goals. Placing money in financial instrument has a lot less to do with returns and a lot more to do with how you envision the returns growing.

With the debate on Mutual Funds vs. ULIPs gathering further steam, it is important that we deconstruct the difference between the two and figure out what works best for you.

The difference

The biggest difference lies in the fact that mutual funds do not offer a life cover; only ULIPs do. This is the money the insurance company promises your family in case of an untimely death.

Risk and Returns

Let’s us better understand the differences using an example –

Mr A invests 50,000 in a ULIP, while Mr B buys mutual fund units with the same amount. All of this money is invested for both Mr A and Mr B. However, every month, a part of Mr A’s investment is taken as insurance cover, which acts as the ‘protection for ‘insurance premium’. This buys him an insurance cover of Rs 5 lakh. In Mr B’s case, he would need to buy an insurance policy separately to get a life cover. In case Mr A meets with an accident and passes away, the insurance company would compensate his family with Rs 5 lakh or the fund value, whichever is higher. This is not so for Mr B.

When to choose a ULIP and when a Mutual Fund?

Investors should understand the difference between investment and insurance. Never mix these two important aspects of your financial life. The purpose of insurance is to protect your family in case of any exigencies. The purpose of investment is to build wealth over time.  Before making a decision to invest in either of the financial products, be clear about what you want to achieve from your money:

# What is your risk appetite?

# What is your financial goal? Do you want to save money for retirement or to meet other foreseen expenses?

# Do you need insurance cover?

# What is your investment horizon?

To sum it up, ULIPs and mutual funds offer a variety of products based on risk profile. Investors should understand their risk profile and investment period and then decide accordingly.

(By Rahul Jain, Head-Personal Wealth Advisory, Edelweiss)