Last Updated on May 24, 2022 by Aradhana Gotur

ULIP vs mutual fund is an oft-discussed topic among investors who are looking for a safe avenue to grow their money. Unit Linked Insurance Plans (ULIPs) and mutual funds, though similar in their underlying concept of investment-based approach (in market-linked avenues), are very different otherwise in their risk-return profile. The debate of which one is better is nonetheless commonly discussed. Which, do you think, is better? If you are deliberating on ULIP vs mutual fund for your portfolio, read on to understand these avenues in depth before making a choice.

What are ULIPs?

ULIPs stand for Unit Linked Insurance Plans. These are investment-oriented life insurance plans with dual benefits of insurance and investment. The premium that you pay is invested in market-linked funds of your choice. In the case of death, ULIPs pay either the sum assured or the fund value, whichever is higher. The advantage of ULIPs is that they are investment plus insurance products. ULIPs come with a lock-in of five years and on maturity, the fund value is paid which represents the value of your investments.

An advantage of ULIPs is that they are a combination of investment and insurance products. Click To Tweet

Features of ULIPs

Some of the common features of ULIPs include the following:

  • The plans continue for a specified tenure. Death within the tenure is covered
  • The minimum lock-in period is five years
  • There are different types of funds under the plan. You can choose to invest in one or more funds as per your risk profile and investment strategy
  • You can make partial withdrawals, switch between the fund options, pay top-up premiums, and redirect future premiums. All these do not attract any additional tax and also make the plan flexible
  • The premium paid towards a ULIP is eligible for a tax deduction under Section 80C. Additionally, the returns from the policy on maturity are exempt from the income tax under Section 10(10D) of the Income Tax Act up to certain limits

What are mutual funds?

Mutual funds are investment avenues wherein different investors pool their money into a corpus. This corpus is invested in different types of market-linked securities depending on the objective of the scheme. Thereafter, if the value of the securities rises, the overall portfolio’s value also rises, and there is capital gain.

Features of mutual funds

Some of the common features of mutual funds include the following:

  • There are different types of mutual funds like equity funds, debt funds, hybrid funds, and others
  • You can invest in a lump sum or monthly instalments
  • You can start investing with as low as Rs 500 per mth
  • Equity-oriented mutual funds are liquid instruments. Except for ELSS schemes which have a lock-in period of three years, most other schemes do not limit redemptions. You can invest at your discretion and redeem whenever you need funds

ULIP vs mutual fund  – the similarities

Some similarities between ULIPs and mutual funds are as follows:

  • Both are market-linked avenues that give returns as per the market performance 
  • The returns are not guaranteed
  • There are different types of funds to invest into
  • The funds are professionally managed by expert fund managers

ULIPs vs mutual fund – the differences

The aforementioned points are where the similarities end. Beyond them, the avenues are quite different from one another. The main point of difference between these avenues is insurance coverage. Unit Linked Insurance Plans allow life insurance coverage wherein a death benefit is paid if the insured dies. Mutual funds, however, do not provide life insurance coverage. They are pure investment plans which help in growing your investments as per the market performance.

Besides insurance coverage, other differences between ULIPs vs mutual funds are mentioned below:

Points of difference ULIPsMutual funds 
Tenure Five years onwards. The maximum tenure depends on the plan that you chooseNo specific tenure. You can invest in mutual funds for as long as you like
Lock-in periodFive yearsOnly ELSS funds have a lock-in period of three years among equity funds. Debt funds have varying small lock-in periods
Charges Different types of charges are applicable under the plan. These include allocation charges, policy administration charges, fund management charges, mortality charges, among othersEntry and exit load are applicable under some plans. Besides these, the charges are expressed as the Total Expense Ratio. The charges are lower than ULIPs
Investment choiceYou can invest in different types of funds under a single planFor investing in different funds, you have to invest in different schemes
Taxation Investment into ULIPs qualifies as a deduction under Section 80C. You can claim a deduction of up to Rs 1.5 lakh. The death benefit is completely tax-free. The maturity benefit is fully tax-free if the premium paid does not exceed Rs 2.5 lakh and is within 10% of the assured sum.
No tax is applicable on partial withdrawals or on switching between funds.
No tax benefit is available on investments. However, if you choose the ELSS scheme, you can claim a deduction on the investment amount, up to Rs 1.5 lakh under Section 80C. Returns earned are treated as capital gains. Taxation of such gains depends on the type of mutual fund scheme that you choose.
Partial withdrawals or switching is treated as a redemption of the fund. These are, thus, subject to capital gains tax.

ULIP vs mutual fund – which one should you choose?

If you are looking for a combination of insurance and investment, you can consider investing in ULIPs. However, keep in mind that the charges might be higher than in mutual funds. Moreover, ULIPs are suitable for medium to long-term investors who don’t mind staying invested in the policy for more than five years. However, for maximum tax benefits, ULIPs score higher than mutual funds.

Mutual funds, on the other hand, give you the benefit of attractive returns and easy liquidity. There is no specific tenure and you can invest as per your wish. The charges are also lower and you can invest in ELSS funds for saving taxes. However, the insurance coverage is missing and your returns might also attract tax. So, choose between these schemes depending on your needs. Assess the pros and cons of both and then make an informed choice. You can also invest in both for creating a diversified portfolio and for fulfilling different financial needs.

Both mutual funds and ULIPs have their respective uses and can fulfil different financial needs. Understand these avenues, their differences, and then choose one which aligns with your investment strategy.