ULIP plans are hailed by several experts and individual investors as the ideal recipes for keeping inflation away, while creating sizable wealth for the future. Are they really better than traditional fixed-income investments, i.e. those with fixed returns? Let us take the example of a Fixed Deposit or FD, which is one of the most popular and preferred fixed-income investments in the country. After comparing an FD with ULIP plans, the results will help you gauge the effectiveness of both in terms of overall returns and benefits. 

What is a ULIP? 

A ULIP stands for a unit-linked investment plan. It ensures a combination of life coverage and investments, where the premium is invested into market-linked instruments for earning returns, after deducting applicable charges. ULIPs give investors the chance to select funds that they wish to invest in, and also periodically switch them to maximize or safeguard their returns based on market conditions and various life stages. ULIPs also come with tax benefits under Section 80C on the premium payments (up to Rs. 1.5 lakh per year). 

What are the benefits of ULIP?

• Investment and insurance: ULIPs are hybrid financial instruments that offer both investment and insurance components. The investment portion of ULIPs is invested in a variety of equity and debt funds, while the insurance component provides a life cover to the policyholder. This makes ULIPs a comprehensive financial solution that can help investors achieve both their investment and insurance objectives.
  
  
• Flexibility: ULIPs offer a high degree of flexibility to investors. Unlike traditional insurance policies, ULIPs allow investors to choose from a range of equity and debt funds to invest their money in. Investors can choose to allocate their investments across different funds based on their investment objectives, risk appetite, and market conditions. Additionally, ULIPs also offer the option to switch between funds periodically, allowing investors to adjust their portfolio to changing market conditions or investment objectives.
  
  
• Tax benefits: ULIPs offer several tax benefits to investors. Premiums paid towards ULIPs are eligible for tax deductions under Section 80C of the Income Tax Act, subject to certain limits. Additionally, ULIPs also offer tax exemptions on the maturity amount received by the investor, subject to certain conditions.
  
  
• Long-term savings: ULIPs are long-term investment options that can help investors save for their future financial goals. Since ULIPs come with a lock-in period of five years, investors are forced to stay invested for the long term, which can help them achieve their investment objectives over time.

What is an FD? 

A Fixed Deposit or FD is a fixed-income investment, where a lump sum amount is invested by the investor into this account. This earns returns at a fixed rate of interest throughout the entire tenure of the investment, irrespective of market conditions or any other factors. The amount cannot be withdrawn before the expiry of the tenure without incurring hefty charges and losses of accumulated returns. The returns may be reinvested each month for getting a lump sum payout at maturity, or they may be taken as monthly, quarterly, or annual payouts, depending on the investor’s preferences. Only 5-year tax-saver FDs come with Section 80C tax benefits. 

What are the benefits of FD?

• Guaranteed returns: Fixed Deposits offer a guaranteed rate of interest on your investment, which is fixed at the time of investment. This means that you know exactly how much you will earn on your investment, and there is no risk of fluctuation in the rate of return.

• Low risk: FDs are considered to be a low-risk investment option, as the rate of interest and the maturity amount are fixed at the time of investment. This makes them a popular choice among conservative investors who want to protect their capital and earn a predictable return.

• Flexibility: Fixed Deposits offer a range of options in terms of the duration of the investment, which can range from a few months to several years. This allows investors to choose a tenure that suits their investment goals and financial needs.

• Liquidity: Although Fixed Deposits have a fixed tenure, most banks and financial institutions offer the option of premature withdrawal or partial withdrawal in case of emergency. This makes them a liquid investment option, which can be useful in case of financial emergencies.

Which is the Better Investment Option – ULIP or FD? 

Here are some core points to help you get a better idea: 

• Unit Linked Insurance Plans (ULIPs) are hybrid financial instruments that offer both investment and insurance components. The investment portion of ULIPs is invested in a variety of equity and debt funds, while the insurance component provides a life cover to the policyholder. In the event of the policyholder\'s untimely death, the insurance component of the ULIP will pay out a death benefit to the nominee. This death benefit is typically equal to the sum assured amount chosen by the policyholder at the time of policy purchase.
  Fixed Deposits (FDs), on the other hand, are purely investment instruments that do not come with a life insurance component. While FDs are relatively low-risk investment options, they do not offer any insurance coverage to the investor or their nominees in the event of the investor\'s death.
  
  
• ULIPs offer a high degree of flexibility to investors. Unlike FDs, ULIPs allow investors to choose from a range of equity and debt funds to invest their money in. Investors can choose to allocate their investments across different funds based on their investment objectives, risk appetite, and market conditions. Additionally, ULIPs also offer the option to switch between funds periodically, allowing investors to adjust their portfolio to changing market conditions or investment objectives.
  FDs, on the other hand, offer a fixed rate of interest that is determined at the time of investment. This means that the returns on FDs will remain fixed throughout the investment period, regardless of market conditions or changes in the investor\'s investment objectives.
  
  
• ULIPs offer several tax benefits to investors. Firstly, premiums paid towards ULIPs are eligible for tax deductions under Section 80C of the Income Tax Act, subject to certain limits. Additionally, ULIPs also offer tax exemptions on the maturity amount received by the investor, subject to certain conditions.
  In contrast, tax benefits for FDs are limited to a specific category of investments, known as tax-saving fixed deposits. Investments in these FDs are eligible for tax deductions under Section 80C of the Income Tax Act, subject to certain limits. However, the returns on FDs are taxable, regardless of whether they are tax-saving FDs or not.

• The returns on ULIPs are variable and depend on the performance of the underlying funds in which the investment is made. As ULIPs invest in a mix of equity and debt funds, the returns on ULIPs can vary widely based on market conditions and fund performance.
  In contrast, FDs offer fixed returns that are determined at the time of investment. These returns remain fixed throughout the investment period, regardless of market conditions or changes in interest rates. This makes FDs a relatively low-risk investment option, but it also means that investors cannot benefit from any market upswings or downswings.

In this case, investing in a ULIP is always the best way to earn higher returns and beat inflation. Along with more tax benefits, there is also the advantage of life coverage that secures your loved ones. With fund-switching and professional fund management, you can always take strategic steps to safeguard or maximize your returns too. Hence, it could be a better option than many fixed-income investments like FDs.