ULIPs, mutual funds or stocks: What's the best for long-term wealth creation?
When it comes to building wealth over the long term, people often come across three popular investment options: ULIPs (Unit Linked Insurance Plans), mutual funds, and stocks. But which one is truly the best for creating wealth over time? Let's break it down in simple terms. UNDERSTANDING ULIPs: A MIX OF INSURANCE AND INVESTMENT
ULIPs are a mix of insurance and investment, meaning a part of your premium goes towards life insurance, while the rest is invested in various funds, like equity or debt. The key advantage of ULIPs is the insurance coverage that comes along with the investment. However, they have charges like mortality costs, higher fund management fees, and fund allocation fees.
According Manish Kothari, CEO & Co-Founder, ZFunds, 'For ULIPs, the associated costs like mortality cost, higher fund management charges, higher fund allocation charges eat into investor savings. Also, ULIPs come with a minimum 5-year lock-in, making liquidity a challenge.' STRICT TERMS AND LIMITED FLEXIBILITY WITH ULIPS
Also, ULIPs have stricter terms. 'Once you go in for a ULIP plan, you need to keep paying premiums without fail for three years or more before you can even take a withdrawal,' said Swapnil Aggarwal, Director, VSRK Capital.
He added, 'ULIPs do not have the option to switch funds or AMC as frequently as mutual funds, either. You are well and truly stuck once you opt for a ULIP plan, and that is quite limiting during times of uncertainty in the markets.' STOCKS: HIGH POTENTIAL, BUT MORE RISK
On the other hand, stocks are shares of companies listed on the stock market. Investing in stocks means you directly own a part of a company. Stocks can offer some of the highest returns over time, especially if you invest in growing companies, but they also come with more risk. Stock prices can be volatile, and short-term market fluctuations can lead to losses.
Manish Kothari stated, 'For stocks, it is essential to plan the entry and exit prices. Making the right calls demands a combination of skill, research and time that the common investors might not have.' MUTUAL FUNDS: THE BALANCED OPTION FOR WEALTH CREATION
This is where mutual funds have an edge. With mutual funds, you don't have to worry about market timing, and professional management helps reduce the chances of making costly mistakes.
Swapnil Aggarwal, Director at VSRK Capital, agrees with this view, highlighting that mutual funds are superior to ULIPs due to their flexibility and liquidity.
He mentioned, 'For long-term wealth creation, mutual funds are comparatively superior to ULIPS because of their flexibility and liquidity. While both ULIPs and mutual funds have similar overall returns, mutual funds give the investor greater freedom.' THE FLEXIBILITY OF MUTUAL FUNDS
Unlike ULIPs, mutual funds allow you to invest or redeem your money at any time without being tied down for a certain period.
'With mutual funds, you have the option to invest or redeem your money at any time without being tied down for a certain period. You also have the choice of switching between the different funds or Asset Management Companies (AMCs) depending on your objectives or variation in the market,' he added.
Manish Kothari, the CEO and Co-Founder of ZFunds, also believes that equity mutual funds are an ideal choice for long-term wealth creation.
'Equity mutual funds are best for long-term wealth creation as they help investors build a diversified portfolio across market caps and industries, that is managed by a professional fund manager. Having a diversified portfolio is crucial to mitigate the market risks and volatility,' said Kothari. COST-EFFECTIVENESS AND ACCESSIBILITY OF MUTUAL FUNDS
Additionally, they are affordable, with fund management fees regulated and reduced as the fund size grows. You can start investing with as little as Rs 10, making them accessible to everyone, mentioned Manish Kothari.
'The open-ended design of mutual funds also enables additional investments and provides liquidity to investors. Thus, making them a more flexible option,' he added. WHICH IS BEST FOR LONG-TERM WEALTH CREATION?
It really depends on your goals, risk tolerance, and investment knowledge. If you want a combination of insurance and investment, a ULIP might suit you, but if your focus is purely on wealth creation, mutual funds and stocks are usually the better options. Stocks might offer the highest potential returns, but they come with more risk and require more attention. Mutual funds provide a good middle ground with less risk and professional management.
Ultimately, the best investment for you will depend on your personal financial goals and how comfortable you are with risk. Diversifying your investments across these options can also help you balance risk and return, ensuring that you're on the right path to building wealth over the long term.
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