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ULIPs Vs Mutual Funds

If you want to secure the future and financial well-being of your family, you must have an efficient financial strategy. ULIPs (Unit-Linked Insurance Plans) and mutual funds are two effective investment tools to create long-term wealth. Both of them have their own advantages and disadvantages. You should choose whether you want ULIPs or mutual funds depending on your financial goals. However, comparison between ULIP and mutual funds is much similar to a comparison between apples and oranges. Read ahead.

What are Mutual Funds?

  • Mutual funds are managed by an AMC (Asset Management Company) where they manage the money of several investors.

  • It is a single financial trust that collects funds from investors and further invests them in different securities such as bonds, stocks, and money market instruments, etc.

  • The performance of the mutual fund scheme is dependent on the performance of these underlying securities.

  • The mutual fund experts or fund managers have deeper knowledge about the nature of the financial markets. They manage the pool of investments and make appropriate decisions on asset allocation.

  • The primary objective of the fund managers is to provide optimum returns to their investors.

  • Mutual funds help investors to have an expert-managed portfolio.

What are ULIPS?

  • An ULIP is an unique offering that combines both the options of investment and insurance.

  • It has both the benefits of an investment as well as a life insurance cover under a single plan.

  • ULIPs are insurance policies that simultaneously offer an investor the potential to create wealth along with the security of a life cover.

  • A part of the premium paid is used for life coverage, and, at the same time, the rest is invested in different types of market instruments such as bonds, stocks, etc.

Which is better - ULIPs or Mutual Funds?

The difference between ULIPs and mutual funds lies in the difference between the benefits of them. When we compare the ULIP plans vs mutual funds, we could get an answer to which is better - ULIPs or mutual funds.

Benefits of Mutual Funds

  • Most mutual fund schemes have flexible withdrawal options. So investors can liquidate the fund any time.

  • It allows investors to build a diversified portfolio by reducing the risk involved when investing in market-linked funds.

  • A financial expert known as a fund manager manages the investment portfolio entirely.

  • The lock-in period for tax-saving mutual funds is three years.

Benefits of ULIPs

  • ULIPs provide the benefits of investment as well as life insurance cover.

  • The lock-in period of the policy is of 5 years and it allows investors to achieve their future financial goals easily.

  • Partial withdrawal from the investment after completion of the lock-in period is allowed.

  • ULIPs offer several tax benefits under the old and new income tax structure.

Difference Between ULIPs and Mutual Funds

To understand the key differentiating points between the ULIP plan vs mutual funds, read the table given below:


Unit Linked Insurance Plan (ULIP) 

Mutual Fund

Investment Objective

 Primarily an insurance product with the added advantage of being a market-linked investment.

 A pure investment product that offers the sole benefit of creating wealth


 Long term investment that helps you build your wealth over time while providing protection to you and your loved ones.

 Short-term investment that can fulfil near-future financial goals.

Regulatory Board

 The Insurance Regulatory and Development Authority of India (IRDAI)

The Security and Exchange Board of India (SEBI)

Return on Investment

 Relatively high returns and it depends on the market performance.

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


 You can decide what portion should be invested and what goes towards life insurance. Similarly, you can switch between the equity and debt funds depending on the market performance.

 Provides zero flexibility as you cannot switch between the funds.

Lock-In Period

 Minimum five years

 Three-year lock-in period for tax-saving ELSS schemes and no lock-in period for regular mutual funds.


 IRDAI provide upfront information on fund allocation.

 The fund houses are mandated to provide a detailed report of the mutual fund investments.

Tax Benefits

  •   The premium paid for ULIPs are eligible for a deduction under Section 80C up to a maximum of Rs 1.5 Lakh.


  • Returns on ULIPs are tax-free under Section 10(10D) of the Income Tax Act, 1961.

  •   Depending on the holding period, a tax of 10% on Long-term Capital Gains (LCTG) and a tax of 15% on Short-term Capital Gains (SCTG) are levied in case of equity funds.

  • For debt mutual funds, LTCG tax is levied at 20% after indexation, while STCG tax is levied according to the investor’s income tax slab.

  • Under Section 80C of the IT Act, 1961, Equity-Linked Savings Scheme (ELSS) funds qualify for a tax deduction of up to Rs. 1.5 Lakh.

Fund Management Charges  1.35%  2.50%

Risk cover

 The nominees are compensated for the sum insured in case of the policyholder’s untimely demise.  

 The investments are transferred to the nominee in case of the policyholder’s untimely demise.  

Factors to Consider Before Deciding Between ULIP and Mutual Fund

Gain maximum understanding of the ULIP and mutual fund difference and consider the factors given below before deciding between the two.

  • Scope

    Mutual funds are only for investment, whereas ULIPs provide investment benefits along with life coverage in a single premium.

  • Investment Returns

    The mutual fund schemes involve comparatively higher risks than ULIPs. The earnings of an investor will be low compared to the money they initially invested if any mishap occurs. In the case of ULIPs, though the returns are low, the beneficiaries can always rely on the life insurance benefits.

  • Investment Flexibility

    In the case of ULIPs, you can decide what portion should be invested and what goes towards life insurance. Similarly, you can switch between equity and debt funds depending on the market performance. For mutual funds, the investor knows whether they are investing in equity-oriented funds or debt funds.

  • Tax Benefits

    Premium paid towards ULIps and the returns on ULIPs are tax-free under Section 80C and 10(10D) of the Income Tax Act, 1961, respectively. However, note that ULIPs issued after February 1, 2021, will be treated as capital gains if the annual premium paid is more than Rs. 2.5 Lakh and such policies will be taxed at 10% at maturity. In the case of mutual funds, tax deductions are not applicable for all mutual funds. Investments made only in ELSS are subject to tax deductions for mutual funds.

  • Expenses

    The charge levied for investment in ULIPs includes premium allocation charge, fund management charge, administration charge, mortality charge, etc. But there is no entry or exit fee on liquid mutual funds. Mutual fund charges are limited to professional management fees and operational fees.

  • Transparency

    ULIPs provide upfront information on fund allocation, whereas the fund managers of mutual funds provide a detailed report of the investments made on your behalf. Therefore, you get a much clearer idea about how your funds are being utilised.

  • Risk Cover

    In case of a policyholder's untimely demise, the nominees are compensated for the sum insured for ULIPs. However, in the case of mutual funds, the investments are transferred to the nominee.


ULIP vs Mutual Funds


After a thorough comparison of ULIPs vs MF, the final decision to invest in mutual funds or ULIP lies completely with the investor. Analyse the financial needs before investing in any financial instrument. Your financial goals, risk profile, investment duration, and ULIPs vs mutual fund returns should be considered before choosing the right option. For example, if you need liquid investments, you can consider investing in mutual funds. This is because ULIPs have a minimum lock-in period of 5 years. On the other hand, if you are looking for insurance as well as wealth creation, you can consider investing in ULIPs. Your needs should align with the option you choose. In a nutshell, ULIPs ensure the investor’s life primarily, while the primary goal of mutual funds is wealth creation. Choose wisely and have a happy investing!


Should I invest in ULIPs or mutual funds?

 You should invest in ULIPs or mutual funds depending on the factors like your current financial condition, current expenses and income, family’s future financial goals and medical needs. Answers to these aspects will put you in a better position to decide between ULIPs vs mutual funds for your investments.

What is the right time to invest in ULIPs?

 Any time is a good time to invest in ULIPs as you can earn dual benefits like life insurance coverage as well as market-linked investments of your choice.

Can ULIPs give high returns?

 ULIP returns depend on the investment component of the policy as well as on the market performance of your funds.  

Is ULIP a mutual fund?

 No, ULIP is a combination of a life insurance policy with an investment component that is invested in various financial markets.

Is ULIP better than mutual funds?

 The answer to this depends on your financial needs and status. The right investment option is one that aligns with the investor’s financial goals, risk profile, and investment duration.

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