Investing for your future is an essential endeavour that you must undertake as early in your life as possible. It is not easy as it requires you to invest time and energy into understanding your requirements and the state of your finances and then choose the right investment avenues. However, when it comes to long-term investments that allow you to fulfil major life goals like your child’s higher education or a comfortable retirement, there is confusion regarding the efficacy of investing in ULIPs (Unit Linked Insurance Plans) vis-à-vis PPF (Public Provident Fund). Both are attractive options, but which one should you go for? Here’s the lowdown.
What is PPF?
PPF (Public Provident Fund) is a savings and investment plan provided and secured by the Indian Government. There are guaranteed returns offered on long-term investments under this scheme. However, the interest rates are declared quarterly and are subject to changes. For example, the interest rates were 7.1% (annual compounding) between January’22 and March’22. The minimum yearly investment amount is Rs. 500, and the maximum is Rs. 1,50,000. This is also eligible for deductions under Section 80C (up to Rs. 1.5 lakh). PPF accounts have lock-in periods of 15 years, with partial withdrawals allowed after six years.
What is ULIP?
ULIPs are unit-linked insurance plans which combine both investment and insurance. Customers can get life coverage throughout the policy tenure while investing in market-linked instruments like liquid, equity, debt or hybrid funds. The returns are linked to market conditions. In case of the policyholder’s death, the higher amount of the sum assured or fund value is paid out to their nominee.
If the life assured (policyholder) survives the policy tenure, they will receive the total accumulated corpus. You may use a ULIP plan calculator to determine these gains. They are popular tools for wealth creation and meeting future goals since they offer good returns over the long haul. Policyholders are allowed to choose the funds they wish to invest in and are also given the option of periodically switching between them to lower risks and maximize returns.
Which one should you choose?
Here are the key differences worth noting for both these investments-
|Product Type||ULIPs are insurance cum investment plans||PF accounts are just investment oriented|
|Lock-in Period||5-year lock-in period||15-year lock-in period|
|Premiums||Premium depends on the sum assured, tenure, age, and many factors||The minimum investment amount for PPF is Rs. 500, with the maximum going up to Rs. 1.5 lakh for a financial year|
|Charges||ULIPs have various charges like mortality, premium allocation, fund management, and administration charges||PPF has no charges, except for Rs. 100 that has to be paid for opening an account.|
|Withdrawals||Partial withdrawals are possible only after the lock-in period of 5 years||Partial withdrawal is possible only after six years from the date of opening the account. One withdrawal is allowed for every financial year.|
|Type of Returns||Market-linked returns (with fund switching feature)||Fixed returns|
|Tax Benefits||Eligible for tax deductions up to Rs. 1,50,000 under Section 80C||Eligible for tax deductions up to Rs. 1,50,000 under Section 80C|
Which one is the better choice?
Now that you know how these two investment options are different, which one should you invest in? Let us first take a sample illustration to understand the returns. If you invest Rs. 1.5 lakh in ULIPs and PPF for 15 years, your total maturity amount may differ.
If you invest Rs. 12,500 per month (Rs. 1.5 lakh per year) in a ULIP for 15 years, assuming an interest rate of 8%, then you will build a corpus of Rs. 43.5 lakh in this period. Hence, by investing Rs. 22.5 lakh in 15 years, you get Rs. 21 lakh as returns. This means that you ultimately get a healthy return every year on your investment if your stay invested for the long haul.
If you invest Rs. 1.5 lakh per year in PPF for 15 years (Rs. 12,500 every month), then you will get Rs. 40.68 lakh in total. This means Rs. 18.18 lakh will be your net gain on an investment of Rs. 22.5 lakhs.
ULIPs are ideal for investors looking to build wealth for the future and get life insurance coverage simultaneously. In addition, these plans may help them build a corpus for future objectives, including retirement funds, higher education and weddings of children, buying a home, and so on.
PPF is ideal for those who are risk-averse and are okay with earning low but fixed returns. The long lock-in period is also suitable for those comfortable keeping their investments locked away to build a retirement corpus. Most people use PPF for retirement planning or meeting goals like higher education or weddings of children down the line. It also offers tax benefits to investors.
To conclude, if you want a more dynamic investment that gives you life cover and the chance to build a sizable future corpus, then ULIPs are ideal options. But, of course, you should have some risk appetite while being ready to switch and align funds periodically to meet your financial goals.