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SIP or ULIP – which one should you invest in and why

SIP meaning

A systematic investment plan, long for SIP, is a mode to invest in mutual funds. Over the years, mutual fund investments have gained momentum in India. Several investors are shifting to mutual funds from traditional investments because of the high risk rewards ratio that they carry. Earlier, there was only one way to invest in mutual funds. Investors had to make a onetime lump sum investment in mutual funds right at the beginning of the investment cycle. This exposed an investor’s entire investment amount to market volatility.

Because of SIP, investors have the option of exposing only a limited amount to market volatility rather. That’s because with SIP you can invest small amounts at regular intervals just like you do for a fixed deposit. Every month on a fixed date a predetermined amount will be debited from your savings account and electronically transferred to the mutual fund you’ve invested in. Suppose you want to invest Rs. 1.2 lakhs annually in a mutual fund. If you made a lump sum investment you will be exposing the entire Rs. 1.2 lakhs right at the beginning of the investment cycle. On the other hand, if you are investing Rs. 10,000 per month through SIP, you are only the SIP amount is exposed to market volatility and not the entire investment amount. SIPs are ideal for those with a long term investment horizon or for anyone who wishes to inculcate the habit of investing regularly.

ULIP Plan meaning

A ULIP plan is a financial product designed to meet your long-term financial goals and varies from your typical insurance policy. There’s a premium you need to pay and some part of this premium is invested in a variety of funds depending on what amount of risk you are will to take. If you want to bate a higher risk, you can invest in equity funds. But if your appetite for risk isn’t too much then you may want to settle for balanced funds. After all, it is an investment for your financial goals and you need to decide which pattern suits your requirements.

Another benefit and insurance company offers with you ULIP plan is that from time to time you can switch between funds. When you are young in your professional career, investing in equity fund seems to be a perfect choice. But as you near retirement responsibilities increase and you might want to compensate equity funds that come with higher risks for debt funds that offer lower returns.

What is the difference between SIP and ULIP?

Parameters SIP ULIPs
Type of Investment SIP is pure investment in mutual funds through systematic payments at regular intervals ULIP is an insurance cum investment plan
Lock In Some mutual funds like ELSS come with a 3 year lock in period ULIPs come with a statutory five year lock-in period
Redeeming options Except ELSS, investors can withdraw their mutual fund units on any business day ULIPs allow partial withdrawals after five years
Tax benefits According to Section 80C of the Indian Income Tax Act, 1961 investments of up to Rs. 1.5 lakhs per fiscal year in ELSS are eligible for tax benefits. Investors can claim for tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. Under Section 10(10D) death and maturity benefit is tax free
Add-on benefits No additional benefits Upon completion of the lock-in period, additional fund units are issued to the ULIP holder.

Now that you know the difference between SIP and ULIP, which is one that you are going to invest in? If you are looking for pure investment plan then SIP is a decent option. But if you are looking a plan that gives you an opportunity to invest in multiple, market-linked, top performing ULIP funds and also offers insurance benefits, then a ULIP might work in your favour.

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