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With the market rising phenomenally the past few weeks, most investors are bullish on their prospects. However there are others that warn of correction in the market soon. A statement that seems to be playing out in the markets today. However this has failed to dampen the sentiments of most investors. The common investors like you & me might be nervous but still hopeful.
One route most financial consultants suggest is investing in Mutual Funds. This comparatively reduces the risk of the investor due to two main factors. One - the fund is managed by professional fund managers & two - the funds generally have a diversified exposure thereby reducing the chance of huge losses.
It was not long before insurance companies saw an opportunity in the booming equity market & came out with market linked insurance products popularly known as Unit Linked Insurance Products (ULIP). They were a hit from the start since the USP was of getting insurance cover while benefiting from the returns offered from the stock market. The natural question that then arises in the minds of investors is - which is better - Mutual Funds or ULIP’s.
The answer lies in the risk taking appetite of the customers. Mutual Funds are aggressive risk takers as compared to ULIPs primarily because MF’s are primarily wealth creation tools while ULIPs have a life insurance & an investment objective. While equity MFs may go 100% with their exposure to equities, ULIPs rarely do so. Also MF’s tend to churn their portfolio more often then Life Insurance companies. Due to their natuire of business, insurance companies are more conservative & tend to take long term investment decisions. To put it simply Mutual Funds have a higher level of risk attached to it than ULIPs.
This is a reason why short term returns from ULIPs pale in front of return from Mutual Funds. However on the long run, both end up performing in a similar fashion. The difference also lies in the manner how both these products are designed.
Hence if you have a weak stomach for risks, are more of a long-term player & wish to hit two birds with one stone, ULIPs are meant for you. However if you are more adventurous, are willing to play a short term game & more market savvy Mutual Funds might be the answer. For such individuals a pure life insurance scheme is the best bet rather than an ULIP.