2 min read
05 Jan 2021

Your investments in SIPs and ULIPs (Unit Linked Insurance Plans) allow you to benefit from the gains associated with investing in market-linked instruments. However, there is a marked difference in how they earn returns and how they function. For example, the tax benefits for both these instruments vary. So, if you are debating which one of these you should opt for, take a closer look at both options.

What is the difference in terms of benefits?

Since SIPs help you invest in mutual funds or ELSS (Equity-Linked Saving Schemes) regularly, they allow you to grow your wealth steadily over a long period of time. In this regard, ULIPs offer an additional benefit. You can get life insurance cover, as well as enjoy the benefits of an investment.

What is the difference in terms of tax benefits?

Both SIPs and ULIPs allow you to claim deductions under Section 80C of the Income Tax Act. The maximum amount of deduction is Rs. 1.5 lakh. So, the amount you invest can be subtracted from your taxable income up to this limit. However, the benefit is that ULIPs of any amount from any insurance provider fetch you a deduction. On the other hand, SIPs offer EEE (Exempt, Exempt, Exempt) tax benefits. Here, the amount that you invest, the amount on maturity and withdrawal are all tax-free.

What is the difference in terms of charges?

The charges on ULIPs are as per Insurance Regulatory and Development Authority’s rules. This means apart from the premium you pay; the insurance provider is likely to add more charges such as a premium allocation charge, administration charge, mortality charge, fund management fees, etc. On the other hand, there is no extra charge on SIP. You only have to pay the penalty if you exit your policy immediately after starting it before the holding period is over.

What is the difference in terms of returns?

ULIPs return depends on whether you have chosen a ULIP, which means investing in debt funds, equity funds or hybrid funds. However, this factor is easier to determine when it comes to SIPs. You can expect returns ranging from 12%–15% on average. In some cases, returns go up to 20%–22% as well.

What is the difference in terms of risk and lock-in period?

As both investments are made in the market, they carry significant risk. In terms of benefit at maturity, it is best to plan both these instruments keeping long-term gains in mind. Here, one big difference between the two is that SIPs are highly liquid, and you can end your investment anytime you want to. This is true unless you take an ELSS-backed SIP, in which case you have to adhere to a lock-in period of 3 years. However, a ULIP comes with a 5-year lock-in period, and you cannot break the policy before its maturity.

Based on these differences, your financial goals and risk appetite, you can decide whether you should opt for ULIPs or SIPs.

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