Choosing an appropriate investment option is a very tiresome and confusing task for any would-be investor. With the availability of numerous options in the market, more often than not, an investor is always on a lookout for the most reliable and most feasible investment option.

While looking for a long-term investment which provides them with the maximum returns, investors often end up choosing between unit-linked investment plans and mutual funds. In order to safeguard their future financial needs, it is very important to understand the difference between these two popular instruments of investment in detail.

Although both these investments rely on the state of the financial market, they have their respective benefits.

Unit Linked investment plans are instruments of investment which allow the investor to get the dual benefit of getting a source of income as well as insurance. These options are most feasible for investors looking to combine and reap the benefits of investment with insurance.

The basic features of investment, that can help in making a distinction between the two long-term options, are-

1. Debt Benefits

Overall, ULIP investments carry a debt burden. In the category of ultra-short bond investments, which bear fixed returns, mutual funds outperformed ULIP investments. In short bond category of investments, mutual funds beat the returns of ULIPs by reaping 7.30% over the 6.6% earned by the ULIPs.

Other than having lower returns, ULIP investments also carry multiple overhead charges which reduce the overall returns, such as mortality charges, premium allocation and policy administration. The major reason for lower returns on ULIPs is due to the high charges of fund managers which range from 0.65% to 1.5% in comparison to 0.28% to 1.48% charged by fund managers of mutual funds.

2. Equity Benefits

The 3 main categories of investment in equity are-

• Large-cap funds which require a large investment and provide an option of earning high returns.
• Mid-cap funds are the funds that have investment options for middle-ranged companies and stocks
• Balanced funds are the investment options for investors who wish to invest in shares and stocks which provide a safe return on investment with minimal risks.

In the category of balance funds investment, ULIPs fall behind mutual funds, which have performed better consistently. Though the difference between the two investments is not big, mutual funds are said to perform better than ULIPs for this category. Numerically, in a 3- year tenure of investment, ULIP vs mutual funds returns are seen to be at 7.37% and 7.75% respectively while in 5-year tenure of investment, 9.21%, and 9.74% returns were seen for ULIP vs mutual funds.

In the category of mid-cap and large-cap funds (fincash[dot]com/l/best-large-and-mid-cap-funds), ULIPs perform better and have better returns than mutual funds in a three-year tenure of investment. While in five-year tenure of investment, mutual funds perform marginally better.

3. Overall Returns

Although there are no large gaps between the returns earned from ULIPs and mutual funds, the following table illustrates the various returns in both three and five-year tenure of investment.

An investor should carefully assess his investment goals, study the performance of both the instruments of investment and decide the time for which he wishes to make the investment. Only then will he be able to ascertain the most appropriate long-term investment option out of mutual funds and ULIPs.

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