What is the Difference Between Mutual Funds and ULIPs?

When it comes to selecting the best investment option, mutual funds and ULIPs are two options that individuals often come across. If you require life insurance and would like it to be combined with investments, you might want to look into Unit Linked Insurance Plans (ULIPs). Nevertheless, if you have sufficient insurance coverage through separate policies, mutual funds can be a more suitable option if you only intend to invest. However, choosing between the two should be based on the goals and requirements of one's financial situation. This article discusses the differences between ULIP vs mutual funds.

 

What are Mutual Funds?

 

A mutual fund is an investment vehicle in which the capital of investors having a common objective is pooled together. This pooled capital is invested in a variety of equity and debt instruments. The fund manager manages the fund on behalf of investors. In addition, there are various types of mutual funds based on your investment objectives. such as the type of market, duration, and risk factor. The gains generated from the fund are distributed among investors after deducting the expenses and levies.

 

SIP (Systematic Investment Plan) and lump sum are two ways to invest in mutual funds. In SIP, individuals invest regular amounts periodically, weekly, monthly, or quarterly. Whereas in lump sum, a significant sum of capital is invested in one go. Equity, debt and hybrid funds are common types of mutual funds investors can choose from.

 

Benefits of investing in mutual funds

Here are the benefits of mutual funds:
 

• By investing in mutual funds, you can have flexible withdrawals.
• The funds can be easily liquidated at the investor’s convenience.
• Investors can choose to invest in different types of funds. They can invest from low-risk funds to high-risk funds to diversify portfolios.
• The mutual fund is managed by the fund manager. The expertise of the fund manager plays a major role in the growth of the fund.

 

What is ULIP?

 

ULIPs are plans that provide insurance cover as well as returns on investments in different avenues. Investors can invest either in equity or debt, or else in a mix of both types of assets through this plan. Moreover, investors can change the asset classes when required.

 

When investors buy a ULIP, they have to deposit a regular premium or make a one-time payment. The premium is divided into two parts. The first part is invested in a life insurance plan, and the other goes toward an investment plan. In this way, ULIP offers a unique method of investment plus insurance.

 

Benefits of investing in ULIP

The following are the benefits associated with ULIP.
 

• ULIP serves a dual purpose for the investor, offering both protection and capital growth.
• The plan has a lock-in period that may help investors save capital for the future.
• After completion of the lock-in period, partial withdrawal is allowed.
• By investing in ULIPs, investors can diversify their portfolios.
• Investors have the flexibility to allocate their future premiums to funds of their choice.
• ULIP may provide long-term benefits along with significant returns.

 

ULIP vs mutual fund

To help you choose the right investment for your needs, here is a quick look at the comparison between ULIP and mutual fund:

Parameter	ULIP	Mutual Funds
Purpose	ULIP is an insurance product with the added advantage of being a market-linked investment.	A mutual fund is an investment product that has the objective of creating wealth and has the potential to generate reasonable gains in the long term.
Tax* Benefits	Tax* deductions are available for premiums paid, and tax* exemptions are available for maturity amounts.	Under section 80C, only ELSS mutual funds are eligible for tax* deductions.
Charges	Charges involved in ULIPs, like premium allocation, policy administration, mortality, and fund management charges.	Mutual funds include charges like expense ratio and exit load, making them more cost-effective.
Lock-in period	The lock-in period for ULIPs is 5 years.	Mutual funds, especially open-ended ones and ELSS funds, do not have a lock-in period.
Liquidity	They have a five-year lock-in term, which makes them less liquid. You might be penalised for making withdrawals too soon.	Mutual funds are highly liquid; you can easily redeem them at any time.
Return	The return depends on the performance of the chosen fund and is usually moderate due to insurance costs.	Mutual funds generally offer better market-linked returns as the full amount is invested without insurance deductions.
Who should opt for it?	Suitable for individuals seeking both life insurance and investment in a single plan.	Suitable for investors focused only on wealth creation without the insurance component.

 

Factors to consider before deciding between ULIP and mutual fund

Before making a decision on ULIP vs mutual funds, there are some factors that must be put into consideration.
 

Tax benefits

ULIPs:

• Premiums are deductible under Section 80C (up to 1.5 lakh per year).
• Maturity proceeds are tax-free under Section 10(10D) if annual premiums don’t exceed ₹2.5 lakh.
• In case the premium is more than 2.5 lakh, then LTCG above 1.25 lakh is subject to tax at a rate of 12.5%.

Mutual funds:

• Only ELSS funds are eligible for deductions under Section 80C (up to ₹1.5 lakh).
• LTCG on equity funds above ₹1 lakh is taxed at 10%; STCG (within 1 year) is taxed at 15%.

 

Portfolio flexibility
 

ULIPs:

• Offer limited fund choices (equity, debt, or balanced) based on insurer options.
• Allow fund switching, usually with a limited number of free switches per year.
• Suitable for long-term investors who prefer a stable structure.
   

Mutual funds:

• Offer a variety of choices, including sectors funds, debt, equity, and hybrid funds.
• Redeeming and reinvesting makes switching simple, although there may be exit loads or taxes involved.
• A quicker reaction to market fluctuations, making it perfect for active investors.

 

Financial goals & investment horizon
 

ULIPs:

• Designed for long-term goals like retirement or child’s education.
• Encourage disciplined investing by imposing a mandated 5-year lock-in term.
• May not suit investors who require immediate liquidity.
   

Mutual funds:

• Suitable for short-, medium-, and long-term goals.
• No lock-in period, except for ELSS (3 years) or close-ended funds.
• Highly flexible for changing financial objectives.

 

Risk Factor
 

ULIPs:

• Risk varies with fund choice; equity ULIPs are riskier, but debt ULIPs are more stable.
• Offer life insurance and fund-switching options to manage risk better.
• Best for low to medium risk-tolerant investors seeking gradual growth.
   

Mutual funds:

• Range from low-risk (debt) to high-risk (equity or small-cap) funds.
• The investor bears the entire risk as per market performance.
• Applicable with moderate to high-risk investors who can tolerate the market volatility.

 

How to Choose Between ULIP and Mutual Fund?

To decide whether you should go for a mutual fund or suitable ULIP Insurance you must consider your personal financial requirements. It is very important that you take into account your financial objectives, risk appetite, and also your liquid cash needs.

In case you want investment avenues that comes with the facility of providing liquid cash whenever you need, then you may opt for mutual funds which generally don’t have lock-in periods like ULIPs. Instead, if your aim is to accumulate wealth over time, then ULIPs may be a more suitable choice.