ULIPs vs PPF vs MF : A Comparative Analysis

Public Provident Fund or PPF

Public Provident Fund (PPF) is a long-term saving option to help people get into the habit of saving for their life after retirement.

The PPF is a government-sponsored, voluntary, and non-regressive pension plan for workers and employers. The interest earned on the money deposited in the Public Provident Fund (PPF) is exempt from income tax. The interest earned on PPF deposits is also not subject to any other tax, such as wealth tax or CIT.

Pension is a form of deferred payment for life and health care services provided by employers or employees to an employee after retirement or during his/her service period.

Pension is usually provided to retired employees who have contributed to the pension fund during their working life. Pension payments are usually paid monthly or quarterly according to the terms of the contract between employer and employee.

To calculate these Pension payments, you can try out the Online PPF Calculator. It is a free online calculator which runs PPF computations based on the yearly investment amount, rate of interest, and time period.

• Mutual Funds

Mutual funds are comprised of a pool of investors who pool their money together to purchase shares of companies that they believe will grow over time and increase in value, thus making them profitable for them individually as well as collectively when they sell their shares at a later date (usually after 5-7 years).

MFs are very popular among investors because they provide passive returns that do not require any active management or attention from the investor, which makes them appealing to retirees who do not want to have to deal with day-to-day issues like stock trading or portfolio management in order to achieve their financial goals.

Mutual Funds can be broadly classified into three types: 

• Equity Funds

  Equity Funds are the fund that primarily invests in equity or equity-related instruments. These funds are usually higher-risk funds and also tend to offer better returns than other types of funds. 

• Debt Funds

  Debt Funds are the fund that primarily invests in debt securities or money market instruments. These are less risky than equity funds but the returns are also lower. 

• Balanced Funds

  Balanced Funds are the fund that invests in both equity and debt instruments. They tend to have moderate risk associated with them and offer moderate returns. 

ULIPs vs Mutual Funds vs PPFs

Here is a comparison study between these three investment vehicles:

• Factor: Investment Focus

• Mutual Funds: Wealth creation or regular income
• ULIP: Insurance and wealth generation
• PPF: Post-retirement income

• Factor: Lock-In Period

• Mutual Funds: Open-ended schemes have no lock-in. Closed-ended schemes have a maturity period. Also, ELSS schemes have a lock-in of 3 years.
• ULIP: Lock-in period of 5 years
• PPF: Mandatory lock-in of 15 years

• Factor: How Much Can You Invest?

• Mutual Funds: You can start investing with a SIP or Rs.500. There is no upper limit. 
• ULIP: Depends on the plan. Also, the life cover depends on the premium amount. Hence, the minimum amount is higher than in mutual funds.
• PPF: You need to invest a minimum of Rs.500 and a maximum of Rs.1.5 lakh in a financial year.

• Factor: Charges 

• Mutual Funds: Annual Fund Management Charges (Expense Ratio) and Exit Load (in some cases).
• ULIP: Premium allocation charges, mortality charges, administration charges, and fund management charges.
• PPF: One-time account opening charges of Rs.100.

• Factor: Tax Benefits

• Mutual Funds: For the sake of comparison, we will talk about ELSS schemes. The amount invested in these schemes can be deducted from your taxable income up to a limit of Rs.1.5 lakh in a financial year. This benefit is available under Section 80C of the Income Tax Act, 1961.
• ULIP: The invested premium of up to Rs.1.5 lakh per year can be deducted from your taxable income under Section 80C of the Income Tax Act, 1961. 
• PPF: The amount deposited in the PPF account in one financial year can be deducted from your taxable income subject to a limit of Rs.1.5 lakh per year. This is under Section 80C of the Income Tax Act, 1961. 

• Factor: Withdrawals/Redemptions

• Mutual Funds: Open-ended schemes - You can redeem on any working day; Closed-ended schemes - You can trade the units on the stock exchange; ELSS - You can withdraw only after three years. Premature withdrawals are not permitted.
• ULIP: Partial withdrawal is allowed only after the completion of the lock-in period.
• PPF: Partial withdrawal allowed from the 7th year onwards. Complete withdrawal only after the completion of 15 years.

• Factor: Investment Risk

• Mutual Funds: Depends on the type of scheme. Equity schemes have higher risks as compared to balanced and debt schemes. 
• ULIP: Depends on the balance of equity and debt in your investment portfolio.
• PPF: No risk as it is backed by the Central Government.

Conclusion

Investment in ULIP is less popular than investing in PPF and mutual funds because of the cost involved. The tax benefits from unit-linked insurance plans make them more attractive than both PPF and investments in mutual funds.

Moreover, insurance protection schemes for ULIP also ensure returns on investments. Hence, it is quite clear that ULIP could be a good option for investments to accumulate your retirement corpus, but it must be done judiciously. So, choose wisely!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.