INVESTMENT: Ulips give market-linked tax-free returns

This being the tax-saving season, many of you must be confused about investing in Unit Linked Insurance Plans (Ulips) or mutual fund schemes. And the debate on which is the better option, has become more shrill since the introduction of the long-term capital gain (LTCG) tax on mutual fund/equity investments in last year's Budget.

But as investors it is advisable not to to get in to this comparison at all, because both are totally different products and the comparison may not be an apple-to-apple comparison.

Every financial product has its own merits and demerits and one size doesn't fit all. One needs to take a call based on whether any products suits you or not as against whether it suits others or not in general. Let's understand when investing in Ulips could be a better investment proposition for you as compared to mutual funds or other financial products:

Higher coverage: Ulip can be a boon for someone who is not able to buy pure term plans with higher cover because of their low income. Today, there are Ulips in the market that offer as high as 40 to 50 times insurance cover on your insurance premium.

Tax saving: A great tax-saving investment product has a lot to be judged on the basis of its lock-in period, returns and taxability of its returns. Traditional investment products like Provident Fund, Public Provident Fund, endowment policies, National Savings Certificate come with a long maturity cycle ranging between 15 and 20 years or more, apart from giving fixed returns pattern. Ulips offers better market-linked returns and the lock-in period is also only five years as compared to traditional products.

Tax-free returns: If you compare Ulips with MFs, the maturity is tax-free in case of Ulips. MFs are taxed at the rate of 10%. And if you compare their returns and assume that both MFs and Ulips will give you 12% returns, then Ulips will provide you better returns in the long run, say around 10 years or so. This is mainly due to the impact of LTCG tax as levied on MFs and also lower charges in Ulips, nowadays.

Disciplined investment pattern: Ulips have a a lock-in period of five years and make you committed to keep your money invested in the market for a long period and also make you save every year which otherwise doesn't happen in any investment product which comes without a commitment.

Switching benefits: Ulips allows you to switch between six to eight different funds without incurring any charges and capital gains. This switching benefit allows you to choose growth, balanced or income funds as per your need.

Charges: Earlier, high charges were a big drawback in case of Ulip, but the insurance regulator has reduced charges, making it more attractive than before.

Ulip is a good wealth creating investment tool that will help you diversify your overall investment bucket, specially if you are new to equity investments and also someone who is a fan of FDs or traditional financial products. But take your decision after careful consideration.

If you can judiciously monitor your investments, are disciplined enough to increase your MF or equity investments regularly and able to manage it optimally so as to save on exit loads and switching charges, then investing in MFs is better. Otherwise Ulips could give you better returns under certain situations.

The writer is chief gardener, Money Plant Consultancy