When planning your investment strategy, it is necessary to build an emergency fund. This fund comes in handy during uncertain economic times such as a pandemic. However, it is never too late to start investing in one for the near future.
Usually, first-time investors tend to invest in equity-oriented funds with the hope of earning high returns in the future. Meanwhile, they forget to build an emergency corpus that they can get their hands on immediately in the time of need.
There are a few wise investors that recommend starting a Systematic Investment Plan (SIP) or Unit Linked Insurance Plan (ULIP) when building an emergency fund. During a pandemic situation, starting a SIP or ULIP investment plan could come in handy soon.
If you are confused between whether to invest in ULIP or SIP, then you have come to the right place. The following are certain parameters that can help you decide whether you should invest in a ULIP investment or SIP for building an emergency fund.
With unit-linked insurance plans (ULIPs), you profit from the investments in market-linked funds and enjoy life insurance coverage alongside. Hence, ULIP investments are said to offer dual benefits.
A SIP on the other hand only focuses on the investment and does not offer any life insurance benefits.
- Risk Involved
SIPs are solely an investment product and thus can be quite risky. Whereas, even though ULIP investments are market-linked, all the money invested does not go towards the funds. A part of the premiums you pay is utilized for investments, while the remaining amount is used for life insurance cover.
This way, you do not lose all the money if the fund performance does not work in your favor. Hence, the risk involved in ULIPs is relatively lower than the SIPs.
- Tax Benefits
The investments made under ULIPs can be claimed for tax deduction under Section 80C of the Income Tax Act. A total amount of INR 1.5 lakh in investments can be claimed for deductions. Moreover, the maturity benefits of ULIPs are tax-free under Section 10(10D).
When it comes to SIPs, only the Equity Linked Saving Scheme (ELSS) in mutual funds provides tax benefits under Section 80C of the Income Tax Act.
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Between ULIP vs SIP, knowing your financial objectives will help you make a better decision. Since the objective here is building an emergency corpus in case of financial uncertainties, you can choose a ULIP investment as it provides life insurance benefits as well.
However, consider the lock-in period and surrender charges for both the investment strategies before you make your decision.