ULIP vs Mutual fund: Learn the key differences

14 min read • Published 20 October 2022
Written by Samarth Tandon
Ulip vs Mutual fund: Learn the key differences

Uncertainty is part and parcel of life, and the pandemic has affirmed this fact. Thus, backing up your family with a robust financial cover should be the key goal for everyone. Today, plenty of investment options are available in the market. While investing money, everyone is looking for options to earn high returns to financially secure their future. 

The two investment avenues we will discuss today are ULIP (Unit Linked Insurance Plan) and MF (Mutual Funds). Using these two options, you can invest your hard-earned money and create long-term wealth. That said, it can be confusing to choose the right investment option for your needs? To help you form a well-informed decision, we have explained the two options and drafted a comparative study of ULIP vs mutual funds

This guide will help you in having a better understanding of the following points.

What is a Mutual Fund?

For quite some time, Mutual funds have been a popular investment option. But what exactly is a mutual fund? 

Mutual funds are financial vehicles that are managed by asset management companies (AMC) or expert fund managers. The investment amount is collected from multiple investors. Then depending on the fund’s asset class, the collected amount is invested in multiple debt instruments, equities, or other security instruments. You, as an investor, hold a particular unit of these bonds and receive returns based on how the underlying instruments perform. 

Professional fund managers use their expertise to invest money in a fine mixture of investment instruments. The main objective behind this is to achieve fair returns on your investments. Furthermore, by doing so, they help you build a strong, diverse investment portfolio. 

What Are Some Features of Mutual Funds?

There are diverse categories and sub-categories of mutual funds where one can invest their money. Below are a few features of mutual funds that will be beneficial for the investors:

  • Expertise in asset management

When you invest in mutual funds, you do not have to worry about managing all of your investments. Instead, the fund managers from the fund house will do this on your behalf. 

Instead, they will perform all the market research and analyse which securities to buy/sell to generate returns in line with the fund’s objectives. Moreover, you do not have to keep track of market fluctuations or make difficult financial decisions. 

  • Enables diversification

Investors can easily diversify their investments because mutual funds invest people’s money into a range of asset classes. This benefit will not be available for an individual investor who invests in stocks or bonds on his own. In this way, people who invest in mutual funds can make profits with maximum exposure and fewer risks.

  • Easy to invest and redeem

Another major reason people prefer to invest in mutual funds is that it is extremely easy to redeem and invest in. Moreover, investors can sell their fund units at the prevailing NAV. One needs to place a redemption request at the AMC, and the money will be credited to the investor’s linked bank account. 

Even investing in mutual funds is quite hassle-free. One needs to fill up a few forms, select a payment method, submit a few documents, and start investing. All of these steps can be done online.

  • Inexpensive investment option

Investing in mutual funds is more cost-effective compared to individual investments. With it, investors get the benefit of professional fund management and the benefit of portfolio diversification at an affordable cost. SEBI has also mandated that the fund house cannot charge more than 2.25% of the expense ratio from the investors.

  • Availability of SIP options

Mutual funds are the only investment option where you can invest small amounts of money into any fund through instalments. These instalments are called SIP (Systematic Investment Plan), and investors can pay this amount monthly, quarterly or every six months. 

Additionally, in India, there are certain mutual funds where you can start investing by putting in just Rs. 100 every month via the SIP mode of payment. 

  • Options to switch funds 

As an investor, you may be unhappy with the performance of the fund in which you currently invest your money. Then, you can switch funds if your mutual fund has that option available. However, you must be very careful before making the switch and thoroughly research the new fund where you wish to invest your money.

Also Read: Best Investment Plan for Monthly Income

What is a Unit Linked Insurance Plan?

ULIP is a type of financial product with which you will benefit from both insurance coverage and investment in securities. It is slowly becoming popular among Indian investors with high to moderate risk-taking ability. 

In simple terms, ULIP is an insurance plus investment tool, and it will help you create wealth while providing coverage to your family if the case of an untimely demise. The investment amount in a unit-linked insurance plan can be divided into two parts, and they are:

  • The first part of the corpus goes into premium to provide coverage.
  • The second part of the premium goes into investments in equity or debt funds to offer you optimal returns against risks. 

What Are Some Features of Unit Linked Insurance Plans (ULIP)?

ULIPs are not only a life insurance policy but will also help you earn returns from investments in market-linked securities. Here are certain features of ULIP which will be advantageous for buyers:

  • Flexibility in investments as per risk tolerance

ULIPs offer a huge range of debt, equity and balanced funds as options for investors to choose. Moreover, all these funds are from different asset classes with varying levels of risk. So, investors will have the flexibility to choose a fund based on their risk appetite and financial goals. One can also switch funds if he/she wishes to do so within the policy period.

  • Perfect long-term investment option

For people looking for an investment option to stay invested for at least 15- 20 years and reap optimal returns, ULIP is a perfect option. When one stays invested for a long time, all the losses made due to market fluctuations are compensated. 

Besides getting the benefit of life insurance cover, most of the premium amount goes towards investments which will allow investors to create wealth.

  • ULIPs are a type of EEE product

ULIPs are considered EEE products, and the term EEE stands for Exempt-Exempt-Exempt. This is one of the best tax-saving instruments available in the market, and individuals who buy such policies will be eligible for tax deductions. 

Individuals can file their tax deductions during the investment, earning and withdrawal stages. Moreover, the premiums that the individual is paying will be allowed for deductions from the individual’s taxable income under Section 80C of the Income Tax Act, 1961.

Also Read: Key Things to Know About the Ulip Tax Benefits

Difference between ULIPs and Mutual Funds

By getting insights into how ULIP and mutual funds differ, you can answer the question, is ULIP better than a mutual fund? Or vice versa. Let us explore the key differences between ULIP and a mutual fund. The below comparison is based on a few critical points.

  • Investment objective:

ULIP offers the dual advantage of life insurance coverage and financial security by investing in financial instruments. On the other hand, mutual funds are a great avenue for long-term wealth creation but do not offer life insurance coverage. Therefore, it is the prime difference to note when comparing ULIP vs MF.

  • Lock-in-period:

ULIPs are long-term investment options with a lock-in period of 5 years. Redeeming your invested amount before this period stops your insurance cover facility immediately. Further, on surrendering or discontinuing your ULIP policy, you will have to wait till the lock-in period of 5 years to receive your money.

While most mutual funds do not have any lock-in period, there are certain exceptions to this. Firstly, Equity Linked Savings Scheme (ELSS) have a lock-in period of three years. Other than ELSS, there are certain Mutual Funds like a Children’s fund or a Retirement fund which generally carry a lock-in period of 5 years. 

  • Liquidity:

Liquidity defines how quickly and easily you can convert your invested amount into cash. Considering the lock-in period of ULIP, they are less liquid. However, as mutual funds are free of lock-in-period, they are easier to liquidate. You incur an exit load of generally around 1% of the invested amount in case of withdrawal within one year. However, liquid funds are free of exit loads.

  • Tax Benefits: 

ULIPs offer great tax benefits. Firstly, the premiums you pay for ULIPs are eligible for tax deductions under Section 80C. In addition to this, if your premium is below Rs. 2.5 lakh per annum, your maturity proceeds are exempted from taxes under Section 10(10D).

On the other hand, mutual funds do not offer any tax benefits unless you have invested in ELSS that qualify for a tax deduction of up to Rs 1.5 lac under Section 80C. But, the capital gains from ELSS are taxed like an Equity Fund.

  • Policy charges:

Earlier, ULIP used to involve a myriad of charges such as administration fees, withdrawal charges, policy discontinuation charges, premium allocation charges, mortality charges, etc. But these charges are simpler and more streamlined now. In case of online ULIPs, there are just two charges: the mortality charges and the fund management charges. IRDAI has capped the fund management charges at 1.35%. 

Compared to ULIPs, Mutual Funds only charge an expense ratio. This fee is used by Mutual Funds and AMCs to pay for fund managers, conduct audits, recruit research analysts, regulatory compliance, and carry out administrative tasks. In addition to this, Mutual Funds charge an exit load which acts as a penalty when an investor redeems their investment too soon. 

  • Investment returns:

While choosing between the two, it is vital to compare returns of ULIP vs mutual fund returns. ULIP is a mixture of insurance and investments, which offers low returns on the investment side. But you can rely on a fixed sum for insurance coverage. 

In contrast, mutual funds have the potential to offer higher returns. You can expect higher risk and higher returns with equity mutual funds than with debt mutual funds. 

  • Risk coverage: 

Returns come with possible risks. So, understanding investment returns with risk coverage is crucial for ULIP vs. mutual fund comparison. For example, under ULIP, in case of an investor’s or policyholder’s sudden demise, the nominees or family members receive the sum assured. In contrast, mutual fund investments offer investment returns to family members or nominees by transferring investments to them.

  • Transparency:

ULIPs used to lack in being transparency towards investors, particularly regarding expenses and asset allocation. However, in light of recent regulations by the IRDAI, ULIPs now provide upfront information on fund allocation. 

In the case of mutual funds, the investment company is mandated to make crucial information available in the form of detailed reports to the investors. The report includes information regarding asset allocation and the respective investment charges.

  • Regulatory body:

The Insurance Regulatory Development Authority of India (IRDAI) regulates ULIP, whereas the Securities and Exchange Board of India administers mutual funds.

  • Investment tenures:

ULIP is a long-term investment wherein mutual fund investments can range between short to long terms.

5 Year Performance of ULIPs and Mutual Funds 

Comparing ULIP vs. mutual funds over a smaller duration can be misleading. So, you must consider ULIP and mutual fund returns over a specific period. Comparing their performance over 5-10 years will give you better investment clarity. 

ULIPsMutual Funds
TypeCategory AverageCategory Average
Large Cap15.7%17.0%
Mid Cap15.8%16.6%
Multi/Flexi Cap15.5%16.0%
Dynamic Asset Allocation10.7%10.6%
Government Bond8.6%8.8%

The returns are based on the actual amount invested. However, this amount can differ for mutual funds and ULIPs because of the structure of ULIPs. For example, if you invest Rs. 100 in a mutual fund, maybe 1 or less than 1% of funds will be deducted as charges. So, almost Rs. 99 will be invested in the fund. But ULIPs have high fees and chargers so maybe only Rs. 95 rupees will get invested in the policy. Even this Rs. 95 will be divided between insurance and investment. So, if you invest the same amount in both, the amount invested in ULIP will be lesser. 

Which is Better- Mutual Fund or ULIP?

Be it mutual funds or ULIP, each has its advantages and disadvantages. However, whether ULIP and mutual funds are better for you depends on multiple factors. These include your financial goals, risk appetite, investment capacities, investment duration, etc. 

To simplify your decision-making process, here are a few conclusions based on the ULIP vs. mutual fund comparison.

You should invest in ULIP if:

  • You prefer long-term investments.
  • You have not yet invested in life insurance coverage.
  • You are looking for a single solution for insurance coverage and wealth creation.
  • You do not mind the lock-in period and low liquidity.
  • You are comfortable with low risk and lower returns.
  • You prefer switching between investment options.

In contrast, a mutual fund will suit you better if:

  • You prefer short to long-term investments.
  • Your primary goal is wealth creation and not the insurance cover.
  • You already have life insurance coverage protection.
  • You are a risk-tolerant person.
  • You prefer liquidity first. 

Concluding Thoughts

We hope the ULIP and mutual fund difference listed above have provided you with an insight into the investment avenues at your disposal. However, before planning to invest in these two options, you must crosscheck a few pointers. These include:

  • A thorough analysis of your investment goals.
  • Expected returns on investments.
  • Your risk-bearing capacity.
  • Past performance of ULIP and mutual fund schemes.

These vital pointers will assist you in making an informed decision regarding ULIP and mutual funds’ investments.

Frequently Asked Questions

What is the correct time to invest in ULIP and mutual funds?

There is no time like now to start investing in ULIP and mutual funds. You can invest any time in both options per your financial needs. However, in ULIP, you should start investing early as the investment is long-term, and there can be an age limit of 60 years. 

What are the different ULIP and mutual fund categories?

ULIP fund type includes equity and debt funds, cash funds, liquid funds, balanced funds, guaranteed and non-guaranteed funds, etc. On the other hand, mutual funds are broadly categorized into two types viz, open-ended and closed-ended. Furthermore, the multiple equity and debt mutual funds are further divided into growth schemes, money market funds, hybrid funds, government securities, etc.

Which is more flexible to switch, ULIP or mutual funds?

ULIP is more flexible as you can easily switch between equity and debt funds and reduce possible risks. Wherein mutual funds are not easy to switch. You need to fill out the switch form mentioning the mutual fund’s scheme and the number of units you want to shift. 
However, before switching between mutual funds, you must first consider the factors of taxation, entry load, exit load, etc.

What is NAV in ULIP and mutual funds?

NAV in ULIP and mutual funds stands for “Net Asset Value.” This NAV is the unit price at which the fund is bought or sold. NAV is directly proportional to the fund’s current market value. Therefore, the increase in market value or performance indicates increased NAV. This mechanism helps you as an investor to forecast the fund’s capital loss or gain over the period.

Do ULIP and mutual funds offer loyalty benefits?

ULIP is great for loyalty benefits if you stay consistent with longer investments. These loyalty benefits are mostly in the form of allocating additional units to investors.  In contrast, mutual funds do not offer any loyalty benefits. 

What is the redemption option in ULIP and mutual funds?

In ULIP, an investor can redeem units on the maturity date. While you do have the option to surrender your policy, the surrendered value will be given only after the lock-in period ends. In mutual funds, you can redeem your funds anytime, except for ELSS funds. However, some funds carry exit load charges if you redeem too soon.

Was this helpful?

Samarth Tandon

Investment Principal
Worked with more than 50 institutions for their Debt raise post MBA. Previously worked with Northern Arc, Unitus Capital, Nomura and Darashaw.

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