A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
How is ULIP different from mutual fund?
An ULIP is a unit-linked insurance plan. It is a life insurance policy with an investment component that is invested in various financial markets. The returns generated by the investment component determine the value of the policy. However, the insured amount at the death of the policyholder may not be a function of the market – the minimum amount insured may not be pre-established. In other words, an ULIP is a hybrid product, combining investment and insurance.
The investment component of ULIP is similar to a mutual fund.
1. Both are managed investments.
2. For both, a team of professionals manages investments and funds are invested in line with a stated objective.
3. There would be
shares allocated to the investor at the time of purchase and there would be NAV per unit declared periodically.
Since ULIP is an insurance policy, failure to pay the regular premium would result in the termination of risk coverage.
In mutual funds, all expenses are charged
before the NAV is calculated, while in the case of ULIP, some expenses are charged as mutual funds, while others are charged by deleting a small number of units from investors’ accounts.
Within a ULIP product, there may be more than one fund option and the investor is free to switch between funds. However, some schemes impose a restriction on the number of free switches in a year. In the case of a common fund, changes from one fund to another are allowed any number of times, but depending on the scheme from which you exit, there may or may not be output loads.