Smartest investment and life plans in UAE

SIP v/s ULIP Where Should I Put My Money?

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  | Published: 05 February 2020 | Last Updated On: 19 January 2021

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Smartest investment and life plans in UAE

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Any successful investor would be able to do two things quite well-
  1. Identifying investment tools, which earn safe and quick returns.
  2. Investing a portion of their income for meeting their short & long-term financial objectives.

Each individual has some short as well as long-term financial objectives in their lives. While the short-term objectives may include going for your dream vacation, home renovation, and more, the long-term objectives include forming a corpus for the following purposes-

  • Retirement
  • Bearing the expenses for the wedding
  • Funding the education of your kids

In order to meet your objectives, you must look for the best investment opportunities in Dubai. SIPs or Systematic Investment Plans and ULIPs or Unit-Linked Insurance Plans are two of the most sought after financial tools, which help you in fulfilling these long-term requirements.

Benefits of SIPs

The following points may convince you to invest in SIPs.

1. Protection Against Market Volatility

Due to the fact that SIPs are a long-term investment, these may be able to keep you safe from market volatility. It keeps your corpus safe from a considerable amount of loss when the market goes down. The fall in your corpus can have a bad impact on your financial objectives.

2. Option to Invest a Small Amount to Begin With

The best part about SIP is that you have the option to start with a low amount of investment. As your income rises with time, the amount can be increased accordingly for building the desired corpus. When you continue the investment for a long period, you can earn good returns through the power of compounding.

3. Helps Make Savings a Regular Habit

SIPs help you to build a habit of regular savings, which is important for the long-term creation of wealth for addressing various objectives. Using the automatic debit facility, a particular amount gets deducted from your account every month and is invested on your behalf.

Benefits of ULIPs

If you are convinced to invest in SIPs, the following points may shift your focus towards ULIPs.

1. Options to Withdraw Partially

ULIPs provides the investor with an option to make partial withdrawals, but after the completion of the compulsory lock-in period. As an investor, you can withdraw the amount according to your objectives and requirements. Although there are no rules as to the amount you withdraw, ensure that you do not withdraw a huge amount such that it results in the termination of the policy.

2. Option to Select the Preferred Class of Asset

This investment tool gives you the option to select the asset class you prefer depending on your risk appetite. In the case of aggressive investors, equities can be an ideal option. While in the case of moderate investors, debt funds can be an ideal option. You also have the option to switch amongst funds in the ULIPs.

3. Not Just Benefits, but Double Benefits

The ULIPs involve insurance as well as investment. A particular part of your premium is engaged in offering life coverage and the other part is invested in the financial market for earning returns and building wealth. The ULIPs provide the investors with double benefits including wealth creation and life coverage.

How are SIPs Different from ULIPs?

The following points of difference will help you in understanding, which amongst the two is better for you.

1. Investment Mix

Since SIPs are pure investment tools, they involve more amount of risk for the investors as opposed to ULIPs. For generating higher returns, the investors are usually required to expose their investment portfolio to a greater amount of risk. On the contrary, ULIPs are a comparatively safer investment tool because they are majorly insurance products. Moreover, fund managers generally avoid the exposure of the investment to higher risks for ensuring that the invested capital is secured.

2. Kind of Financial Tool

One of the major differences between SIPs and ULIPs is that the ULIPs are insurance products, which doubles up in the form of a capital appreciation investment tool. ULIPs, in fact, offer the two benefits in one- both capital investment and life insurance. This means that a part of the premium that is paid towards the ULIPs will go to the investment mix such as mutual funds, while the other part is utilized for offering life insurance to the policyholder. On the other hand, SIPs are pure investment tools and do not provide investors with any kind of insurance coverage.

3. Option to Switch

Another difference between SIPs and ULIPs is the fact that ULIPs offer complimentary switching options making the investment even more flexible for the investors. The investors have the option to invest either in debt funds or equity funds, or both. Additionally, they can decide to switch between the two fund options whenever they feel the need to. Alternatively, SIPs do not have such a feature and the investors are not allowed to switch funds during their investment tenure.

4. Charges for Managing the Funds

The charges for fund management are higher in the case of SIPs. Moreover, there are more charged involved such as exit & entry load charges and recurring charges. On the other hand, ULIPs charge lower than SIPs when it comes to fund management charges making them an ideal investment alternative for the budget-conscious investors.

5. Death Benefit

ULIPs, being insurance products primarily, offer death benefits in the case of the death of the policyholder within the tenure of the policy. On the contrary, SIPs being pure investment instruments, do not offer any death benefit.

6. Option of Withdrawal

You can make partial withdrawals with ULIPs after the completion of the lock-in period. In the case of SIPs, you can withdraw the invested capital anytime except in the case of ELSS mutual funds where you can only withdraw the invested amount after the completion of the lock-in period.

7. Flexibility

There is investment flexibility in the ULIPs because they involve facilities of top-up, premium redirection, and switching. In the SIPs, the capital invested can be decreased or increased, and you can earn long-term returns.

8. Liquidity

ULIPs do not offer liquidity during the lock-in period because you cannot surrender or withdraw in this duration. Whereas SIPs ensure complete liquidity because you can redeem the invested capital according to your convenience.

9. Transparency

ULIPs are very sophisticated products that offer both- investment as well as risk coverage together. They have a lesser transparent structure when it comes to asset allocation and underlying expenses. Alternatively, SIPs are comparatively more transparent about the charges involved and the portfolio holdings.

10. Risk Coverage

The ULIPs have an in-built insurance policy that offers the cover amount or sum insured to the dependents of the policyholders in case of their untimely demise. However, when it comes to SIPs, there is no risk coverage through insurance plans. The investor will have to purchase an insurance policy separately and bear an additional premium amount for it.

When is ULIPs Ideal for You?

The ULIPs are more suitable in the following situations.

  • When the investor looks for a long-term investment horizon.
  • He has a low to moderate risk-bearing capacity.
  • He wishes to have life coverage along with his investment.

When are SIPs Ideal for You?

The SIPs are more suitable in the following situations.

  • When the investor looks for a medium to the long-term investment horizon.
  • He is looking for investments that involve higher liquidity.
  • He has a medium or high-risk bearing capacity.
  • And, he already has a term insurance policy in place.

Over to You!

If you are a middle-class investor, then you may have a limited budget for investment. Hence, it is sensible to look for the best investment instrument carefully with the investment objective of earning the highest returns possible.

Deciding which one to choose amongst ULIPs and SIPs is totally up to you. If you just want to make a pure investment, go for SIPs. However, if you are looking for higher returns along with comprehensive life insurance, ULIPs can be your go-to investment weapon. The bottom line is that whatever you choose, it must suit your financial requirements.