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Better Returns on Investment - SIP vs ULIP

By Vikas Chandra Das
21 July 2022, 11:46 AM
better returns on investment sip vs ulip

Why do we invest? To enjoy great returns after a certain period of time. It is that simple! 

Based on returns, some investment avenues outscore others, making some of them more attractive than others. However, note that higher risks are associated with higher returns, and hence such avenues are not everyone’s cup of tea.

Let’s take you through two of the most popular investment options that help you get good returns in general – SIP and ULIP!

SIP stands for Systematic Investment Plan, which is an avenue that enables investors to grow money through mutual funds of their choice in a periodic manner. By creating a diverse portfolio through a SIP, you should be able to build a substantial corpus over a long period of time.

ULIP stands for Unit-linked Insurance Plan, which is an insurance-cum-investment plan. You can invest in stocks and bonds that are closely related to market conditions and enjoy high returns after a certain period of time. Experts suggest that one should stay invested in ULIPs for a period of 7-10 years ideally to enjoy sizable returns.

Let’s understand factors that affect the returns in SIP and ULIP.

What Factors Affect the Returns on Investment on SIP?

  • Performance of Underlying Securities – Your fund will perform according to the performance of the underlying securities. For example, let’s say your fund manager invests 70% of your capital in equities and the remaining 30% in debt and market instruments. Now, if the stock markets crash, 70% of your investment will take a hit.
  • This is exactly why you should diversify your investments even more so that the negative impact is not that substantial. Try to invest in securities that belong to different industries, geographies, and market capitalisations.
  • Economic Changes in Industries – If there are any economic changes in the sectors and industries that you have invested in, it can have a huge impact on your returns. In a situation where the government has introduced a policy that benefits your industry, it will have a positive impact in all the subsidiary industries as well. Therefore, if you have invested in any of those sectors, you will be able to enjoy higher returns. However, do not forget that it can work conversely as well.
  • Expense Ratio –Mutual funds include fees related to management, distribution, administration, and more. Usually, this ranges from 0.5% to 3%, depending on the mutual fund you have invested in. As a result, this has an impact on the overall returns eventually.
  • Cash Flow – The higher the number of investors in a mutual fund, the larger it will be and the better will the returns be. If a mutual fund starts performing badly, few investors might pull out, thus affecting the cash flow. This results in lowering the returns in the end.
  • Size of the Fund – As just mentioned above, a positive cash flow will generate higher returns, which will lead to more investors. However, if the size of the fund grows too big for the fund manager to manage, it can perform badly. You may exit such funds if you feel that they are poorly managed because of their sheer size.

What Factors Affect the Returns on Investment on ULIP?

  • Investment Strategies Based on Investing in High-risk Equity and Low-risk Debt Funds – The range of stable and high-performing assets in a ULIP can determine the size of the returns. A diversified portfolio in a ULIP will ensure you stay on the course of keeping your investment capital even if there are market fluctuations. The best way to go forward would be to invest in high-risk equity and a low-risk debt fund.
  • Timely Switches Between the Investments – If you can make timely switches from one kind of security to another, based on your age and responsibilities, you should be able to enjoy good returns. In short, you should be open to investing in high-risk avenues at a young age and then switch to low-risk debt funds when there are more responsibilities on you.
  • Long-term Investments too can Help – When it comes to ULIPs, you will have to invest for a long time, say 7-10 years, to truly enjoy the benefits. In fact, if you are ready to go up to 15 years, you should be able to enjoy 10-15% compounding on returns at the end of the term.

Know the Difference Between SIP and ULIP Before You Invest

Here is a small table with key differences between SIP and ULIP, based on some of the top factors.

Type of PlanIt is an investment plan that invests some amount into the mutual fund of your choice. You can make the investments at your own pace, be it weekly, monthly or quarterly.It is a plan that does the job of an insurance policy and an investment avenue as well.
Lock-in PeriodExcept in the case of an ELSS fund, which has a 3-year lock-in period, there is no lock-in period associated with SIPs.There is an initial lock-in period of 5 years.
Withdrawal OptionsYou can withdraw the invested amount any time you want to (unless you have invested in an ELSS fund.)You can make partial withdrawals once the initial lock-in period is finished.
LiquidityIt offers full liquidity as the investor can withdraw, redeem or use the capital investment elsewhere anytime he/she wants.It offers no liquidity during the first 5 years of the term. The invested capital cannot be used in any other way during the lock-in period.
Minimum InvestmentYou can start investing in SIPs with a minimum investment of INR 500. The minimum amount that you are allowed to invest in a ULIP is INR 1500. 
Tax BenefitsIf you invest in SIPs, you will be eligible for tax benefits under Section 80C for up to INR 1.5 Lakhs. The premium you pay can be deducted from your taxes, as per Section 80C. However, the deductible amount cannot exceed INR 1.5 Lakhs. 

How to Choose Between ULIP and SIP-based on Your Goals?

A simple way to look at both SIPs and ULIPs is to associate them with your goals. If your goals are long-term, like your child’s marriage, education, or buying a house, then you should invest in SIPs. It is because they are more likely to offer a higher ROI when invested for a long period of time.

On the other hand, if you are to achieve your short-term goals like buying a car, then you can go for ULIPs. You will be able to enjoy the returns after the initial lock-in period.

In conclusion, you should note that SIPs perform better in the long run.  They also come with the flexibility that can enable you to withdraw the invested capital as and when you like. These benefits make them slightly better than ULIPs. However, do not forget that ULIPs work as an insurance policy as well, offering a life cover, helping your family stay financially stable in case of an eventuality.