ULIPs Vs Mutual Funds

A sound investment strategy allows you to build wealth over time and keep you and your loved ones financially secured in the need of the hour. Thus, people plan their investments depending on their financial goals.

Mutual funds have been a popular investment vehicle in the financial market for long-term wealth creation. However, in the past few years, Unit Linked Insurance Plans (ULIPs) have proved themselves to be an equally worthy option to safeguard your wealth as well as create some more.

While both ULIPs and mutual funds have their respective advantages and disadvantages, it is up to the individual to decide in which financial product he/she wants to invest?

If, as a novice, you are confused about whether to invest in ULIPs or mutual funds, the below explanation will help get you some perspective. We will be discussing in detail what is ULIP, the difference between ULIPs and Mutual funds, and the factors to consider when choosing either of them.

Understanding ULIPs and Mutual Funds

ULIPs are unique insurance policies that offer dual benefits of insurance as well as investment in a single financial tool. Mutual Funds on the other hand acts as a single financial trust, in which the money is pooled together from a number of investors in the market.

In ULIPs, a part of the premium amount is invested in different types of equity, balanced or debt funds (according to your risk appetite). The remaining amount is used for your insurance cover. In the case of a mutual fund, the accumulated money in the fund is then invested in different market schemes and assets to earn high returns.

Difference Between ULIP and Mutual Fund

To gain some perspective on ULIPs and Mutual Funds, you must understand the difference between the two. The following table gives an elaborative comparison between ULIP and Mutual Fund.


Unit Linked Insurance Plan

Mutual Fund

Purpose Of The Policy

It offers life insurance as well as investment benefits

It only provides investment benefits


Ideal for long-term investment and helps you build your wealth over time while providing protection to you and your loved ones

Ideal for accomplishing short-term or near-future financial goals

Regulatory Board

The Insurance Regulatory and Development Authority of India (IRDAI)

The Security and Exchange Board of India (SEBI)


If invested in long-term ULIPs, the returns are relatively high. However, the returns are mainly dependent on the market performance

Investing in equity mutual funds will provide reasonable returns while debt mutual funds may yield moderate to low returns

Money Utilization

A part of the premiums paid are used for insurance coverage, while the remaining portion is invested in funds of your choice

The premiums paid are mainly investment in funds


With ULIPs, you have the flexibility to decide what portion should be invested and what goes towards life insurance.

Moreover, you also have the liberty to switch between the funds (equity to debt and vice versa), depending on your market performance

Mutual funds provide no flexibility as you cannot switch between the funds

Tax Benefits

You can avail tax deductions on the premiums paid under Section 80C of the Income Tax Act, 1961.

Moreover, the maturity amount is also tax-free under Section 10(10D)

ULIPs are also exempted from Long Term Capital Gains (LTCG) Tax

Only the Equity Linked Savings Scheme (ELSS) mutual funds allow you to avail tax deductions under Section 80C of the Income Tax Act, 1961

Lock-In Period

Minimum of five years

No lock-in period for regular mutual funds.

Three-year lock-in period for tax-saving ELSS schemes

Recommended Policy Term

Long term

Short, medium, or long term

Factors to Consider Before Deciding Between ULIP and Mutual Fund

  • Scope of investment

Mutual Fund is solely an investment option. In comparison, ULIPs have an advantage of offering investment benefits, while simultaneously providing life coverage in a single premium.

  • Return on investment

 Mutual fund schemes, as well as ULIP investments, are managed by an expert fund manager. Hence, returns in both these avenues can be high. However, the risks involved in mutual fund schemes are comparatively high. If unfortunately, the investments do not work, an investor will earn low returns compared to the money they initially invested. On the other hand, even if the ULIP returns are low, your beneficiaries can still rely on the benefit of the life insurance.

In comparison, the return of investment in case of ULIPs is slightly low. This is because only a part of the premium is invested in the market. Also, whether the investment works or not, ULIPs promise a ‘sum assured’. This feature does not apply to mutual funds.

  • Flexibility on investment

As an investor, you can shuffle your money between different market funds depending on your risk appetite, anytime during the ULIP term. For instance, if you want to make a safe investment choice, you can invest in balanced or debt funds in the market. However, at any point, if you feel that you want to increase your risk of investment, you can direct your investment to an equity fund.

The only flexibility provided under mutual funds is that the investor knows whether they are investing in equity-oriented funds or debt funds. Once the investment is made, they cannot switch to different fund options like that in ULIPs.

  • Tax benefits

Irrespective of what type of ULIP plan you choose, the investments made on the premium are subject to income tax deductions under Section 80C of the Income Tax Act. ULIP tax benefits are also applicable to the returns at the time of maturity or on the ‘sum assured’ granted to the nominee upon the untimely death of the policyholder during the ULIP tenure, under Section 10 (10D) of the Income Tax Act.

Tax deductions are not applicable for all mutual funds. Investments made only in Equity Linked Saving Schemes (ELSS) are subject to tax deductions for mutual funds.

  • Expenses

At the time of making ULIP investment, you have to consider a lot of charges such as premium allocation charge, administration charge, fund management fees, mortality charges, etc.

In comparison, mutual funds only charge for managing your funds or for exiting fees.

  • Transparency

As is clear from the above point, ULIPs involve a lot of underlying expenses. Not many ULIP providers will be upfront with you about these charges. However, after recent regulation changes, ULIPs have become quite transparent and also provide upfront information on fund allocation.

In case of mutual funds, the fund managers provide a detailed report of the investments made on your behalf. Therefore, you get a much clearer idea about how your funds are being utilized.

  • Liquidity

ULIPs have a lock-in period of five years. Therefore, you have to keep investing in the plan for five years. In case you have to terminate the policy, then you will have to pay the surrender charges, which can be an expensive move.

On the other hand, mutual funds give you the liberty to enter and exit the policy according to your investment plans.

  • Risk cover

In case of your (the policyholder’s) sudden dismissal, the ULIP investment will compensate your family with the sum assured amount under your policy.

However, in mutual funds, the investment policy is transferred to the nominee. As we know, mutual funds are solely an investment instrument and do not provide life insurance coverage.

If you have further doubts on the differences between these products, this infographic will surely help sort out those questions:

ULIP vs Mutual Funds


Both ULIPs and Mutual Funds have their unique benefits and drawbacks. But which one to choose depends entirely on your investment horizon, risk appetite, and financial goals.

As a matter of fact, mutual funds are a suitable investment option if -

  • You willingly want to invest in fund without the liberty to switch funds later in the future

  • You want the liberty of liquidity on your investments

  • You are investing to achieve short-term as well as long-term financial goals

On the other hand, ULIPs are suitable if 

  • You are looking for a tax savings investment instrument

  • You have a low to medium risk appetite

  • Want to invest in long-term investment horizon

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