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ULIPs vs SIPs. Difference between Unit Linked Investment Plan (ULIP) and Systematic Investment Plan (SIP)

Updated on March 16, 2016

ULIPs vs SIPs. Difference between Unit Linked Investment Plan (ULIP) and Systematic Investment Plan (SIP). Which is better?

Both Unit Linked Investment Plan (ULIP) as well as Systematic investment plan (SIP) are innovative investment instruments. They offer investors the flexibility to combine different investment options as well as diversify their investment portfolio. Systematic investment plan (SIP) is a combination of market investment and savings plan, while Unit Linked Investment Plan (ULIP) is a combination of Market investment and insurance cover. Both plans are suitable for small investors

ULIP= Market investment + insurance Cover

SIP= Market investment + Savings Plan

SIP is like a Savings plan that yields fixed attractive returns on your investment. The money put in Systematic investment plans (SIP) is invested in Mutual Funds by the company and a fixed return is paid to the customer. If you enroll for SIP, you will be investing the same amount of money into the SIP fund at regular time periods.

Returns: You earn fixed returns/interest in case of SIPs. The money that you earn is reinvested again and your fund value grows through the process of Compounding. Suppose you invest Rs 40,000 in a SIP that gives returns of 10% per year. You will earn a return of Rs 4000 on the principal invested i.e Rs 40,000. In the second year, the return/interest of Rs 4000 will be added to the principal of Rs 40,000, making it Rs 44,000. This process of compounding will continue thereby increasing the value of the fund.

In case of Unit Linked Investment Plan (ULIP), a certain part of the money paid by the customer is allocated towards Life insurance. The rest of the money is invested in various market instruments like Equities, bonds etc. You can realize the total fund value at the end of the maturity period. Suppose you buy a ULIP with an annual premium of Rs 40,000 for 20 years. The plan will give you an insurance cover of Rs 4 Lakhs (10 times the annual premium). After deducting administrative charges, say Rs 5000, the remaining Rs 35,000 will be invested in a market fund. Based on market performance of the fund, your ULIP asset Value will also increase

Unit Linked Investment Plan (ULIP) offer Tax saving advantage. ULIPs offer tax exemption benefits under 80c and 80D of Income tax act

Risk: SIPs are safe when compared to Unit Linked Investment Plan (ULIP) since they are not dependent on the market situation. You can invest and rest assured of a fixed return. On the other hand, if the market situation is not good, your ULIP asset value will also depreciate.

Bottom line: SIPS are risk-free but returns are comparatively lower. Unit Linked Investment Plan (ULIP) offer higher returns, but carries certain amount of risk

As such, Unit Linked Investment Plans (ULIP) is suitable for people who are willing to take risks and benefit from fluctuations in the capital market. On the other hand, SIPs are suitable for people who want to play safe and diversify their investment portfolio.

To know more about Unit Linked Investment Plan (ULIP) and SIPs, you could go through the below hubs written by myself


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