Know Your Mutual Funds and ULIPs

PRIMARY OBJECTIVE
MFs : Investments
ULIPs: Protection + Investments

INVESTMENT DURATION
MFs: Works out for Medium term, Long Term Investors. Risky for Short Term investors.
ULIPs: Works out for Long Term Investors only.

FLEXIBLITY
MFs: Very flexible. Plenty of scope to correct mistakes if any wrong investment decisions are made. Portfolios can be easily shuffled in MFs.
ULIPs: Flexibility is limited to moving across different funds offered with policy. Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to another ULIP of a different fund house can be expensive.

LIQUIDITY
MFs: Very liquid. MF units can be sold any time(except ELSS).
ULIPs: Limited liquidity. Need to stay invested for the minimum number of years specified before redeeming.

INVESTMENT OBJECTIVE
MFs: MF's can be used as vechile for investments to achieve different objectives.(Eg: Buying a car three years from now. Downpayment for a home five years from now. Childrens education 10 years from now. Childrens marriage 15 years from now. Retirement planning 25 years from now. Medical expenses after retirement 25 years from now).
ULIPs: ULIPs can be used for achieving only long term objectives (Chidrens education, Childrens marriage, Retirement planning).

TAX IMPLICATIONS
MFs: All investments in MF's don't qualify for deductions. Only investments in ELSS qualify for deductions. Returns on equity MF's are exempt from long term capital gains tax.Returns from debt MF's are taxed.
ULIPs: Provide Tax Benefits. Very flexible in moving between equity and debt funds(no tax implications until maturity of the policy).

STRINGS ATTACHED
MFs: None so ever. There is a small exit load if any.
ULIPs: Some strings attached for policy to be in effect. Minimum number of premiums need to be paid. Minimum fund balance need to be always maintained.

ADVANTAGES
MFs: Better returns than ULIPs.- Lower charges than ULIPs. - Very flexible and flexibility to switch investments from non performing MF's to better performing MFs- Very Liquid can be redeemed at anytime.- Best suited for medium to high risk taking individuals who wish to invest a significant portion in equity funds(atleast 65% exposure in equities).
ULIPS:- Can easily rebalance risk between equity and debt without any tax implications.- Best suited for low to medium risk taking individuals who wish to invest a significant portion in debt funds(atleast 40% or higher exposure to debt). No additional tax burden for those investing mainly in debt unlike in MFs.