The most difficult decision for an investor is making the right investment vehicle to help you achieve your financial goals. This can seem overwhelming for a novice investor due to the number of investment options. Or should you choose to invest in shares? Or you can opt for mutual funds. Isn't PPF safe? What is an ULIP? There are many questions. We have many questions.
Mutual Funds are a preferred investment option for Indians. They are professionally managed and pool money from investors who share similar financial goals. These funds are invested in securities to meet the fund's overall investment goal. A fund manager with experience monitors and manages the corpus, making any necessary adjustments to ensure positive returns.
There are 3 main types of mutual funds:
Section 80C of the Income Tax Act, 1961 provides Tax Benefit under Equity Linked Savings Scheme or ELSS,ELSS have a three-year mandatory lock-in period.
Mutual funds also provide many tools and facilities to assist investors. These include:
The Government of India created a long-term savings option in 1968 to encourage people to save for retirement. The Public Provident Fund, or PPF, was the name of this scheme. You must deposit at least Rs.500 each year and up to Rs.1.5 lakh annually in your PPF account. The lock-in period for this account is 15 years. The rate of interest offered through the PPF scheme in Q2 2019-20 was 7.9%
Your capital is safe because this scheme is supported by the Government of India. PPF investments offer tax benefits as per Section 80C, Income Tax Act, 1961. This scheme falls under the EEE (Exempt-Exempt-Exempt) category. This means that the investment and interest earned are exempted from tax at the time it is made, as well as the redemption.
A ULIP, a unique investment vehicle, combines the ideas of insurance and investment. ULIPs provide you with life insurance and the opportunity to earn returns. The premium amount you pay for a ULIP is split into two parts. The first is used to purchase the policy and the second is used to invest in Mutual Funds. There are a variety of ULIPs depending on their investment options. There are two types of ULIPs: a Balanced High equity ULIP that focuses primarily upon equity investments and a Balanced Low Debt ULIP that focuses on debt investments.
Further, ULIPs offer tax benefits as per Section 80C of 1961's Income Tax Act.
This is a comparison of these three investment vehicles.
|Factor: Investment Focus|
|Mutual Fund||Wealth creation or regular income|
|ULIP||Insurance and wealth generation|
|PPF||Income after retirement|
|Factor: Lock-In Period|
|Mutual Fund||Lock-in is not available for open-ended plans. Closed-ended schemes come with a maturity period. ELSS schemes also have a 3-year lock-in.|
|ULIP||Lock-in period: 5 years|
|PPF||Mandatory lock-in for 15 years|
|Factor: How much money can you put into an investment?|
|Mutual Fund||Start investing with a SIP of Rs.500. There is no upper limit.|
|ULIP||It depends on which plan you choose. The premium amount also affects the amount of life insurance. The minimum amount for mutual funds is, therefore, higher than the minimum for mutual funds.|
|PPF||A minimum of Rs.500 and a maximum amount of Rs.1.5 million must be invested in a single financial year.|
|Mutual Fund||Annual Fund Management Fees (Expense Ratio and Exit Load in some cases)|
|ULIP||Premium allocation fees, mortality charges, and administration charges as well as fund management charges are included.|
|PPF||One-time account opening fees of Rs.100|
|Factor: Tax Benefits|
|Mutual Fund||We will be referring to ELSS programs for the purpose of comparison. These schemes can be deducted as taxable income from your income, up to Rs.1.5 lakh per financial year. This benefit is provided by Section 80C under the Income Tax Act 1961.|
|ULIP||You can deduct the invested premium up to Rs.1.5 Lakh per annum from your taxable income as per Section 80C under the Income Tax Act, 1961.|
|PPF||You can deduct the amount you have deposited to your PPF account within a financial year from your taxable income, subject to a maximum of Rs. 1.5 lakh per annum. This is Section 80C under the Income Tax Act 1961.|
|Mutual Fund||You can redeem open-ended schemes at any time|
Closed-ended Schemes: You can trade the units at the stock exchange
ELSS: You can only withdraw after three years. Premature withdrawals cannot be made.
|ULIP||Only partial withdrawals are allowed after the lock-in period has ended|
|PPF||From the 7th year, partial withdrawals are allowed. Only after 15 years have passed can you withdraw completely.|
|Factor: Investment Risk|
|Mutual Fund||It depends on the type and complexity of the scheme. Equity schemes are riskier than balanced or debt schemes.|
|ULIP||It all depends on the amount of equity and debt you have in your investment portfolio|
|PPF||It is guaranteed to be in good standing by the Central Government.|
This article should have helped you to understand the differences between mutual funds, ULIPs and PPF investments. Talk to an investment advisor if you require further assistance before creating your financial plan. Keep these things in mind:
Best Wishes For Investing and Good Luck for the Future.
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