Difference Between ULIPs and Mutual Funds

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Difference Between ULIPs and Mutual Funds

A solid investing strategy may help you build wealth and ensure your family’s financial future. ULIPs (unit linked insurance plans) and mutual funds are both appealing financial products or high-end investment tools or the best wealth creation plans in the Industry. This blog is a comparative study of the features of ULIPs vs mutual fund. Let’s dive in;

What is a mutual fund?

Mutual funds are very common and a bit conventional. A mutual fund is a type of financial instrument in which an asset management company (AMC) administers the funds of many investors. The cash collected is then invested in various securities such as stocks, bonds, money market funds, and so on. Your mutual fund scheme’s success is directly proportionate to the effectiveness of these underpinning securities. Mutual funds are pools of investments that are handled by money managers. It’s comparable to entering a bus when the driver transports all of the passengers to a certain location. In this case, the money manager is the driver, the mutual fund plan is the bus, and the travelers are the investment participants. Money managers are mutual fund professionals who make suitable asset management decisions based on their in-depth understanding of the complexity and volatility of the capital markets.

What is a unit-linked insurance plan?

A unit-linked insurance plan (ULIP) combines investing with insurance. ULIPs are insurance plans that provide an investor with the opportunity to build money while also giving the protection of a life insurance policy. A portion of the payment for ULIPs is used to provide the investor with life insurance coverage. The remaining is aggregated and invested in debt or equity securities, or a mix of both, to help develop long-term wealth.

How ULIP works?

When someone or you purchases a ULIP, he or she must pay a set premium for the level of coverage chosen. While some of the premium paid is used to provide insurance protection, the remaining is invested in either equities or debt instruments. For their investing strategy, investors can pick between stock, debt, and a balanced alternative. They also have the ability to move among investment strategies during the premium payment period. Money managers manage investments based on the kind of fund and invest in debt or equity securities. It is worth noting that the lock-in time for ULIPs is five years, and their performance or capacity to create returns is connected to market conditions, as per the IRDAI.

Difference between Mutual Funds and ULIPs

Both Mutual funds and ULIPs may appear similar at first glance, yet they are not. There are a number of distinctions between these two investing possibilities. Some of the key distinctions between ULIPs and mutual funds are as follows:

Return on investment

The ULIP results are less compared to mutual funds. The reason for this is that ULIPs guarantee a maturity sum regardless of whether the investment plan produces money or not. In contrast, mutual fund returns fluctuate based on the risk element. Equity mutual funds can provide larger returns, whilst debt mutual funds have the ability to provide slightly lower rates of return.

Lock-in Period

ULIPs are basically insurance products. As a result, insurance firms establish the lock-in time for such an investment, after which it cannot be redeemed. Based on the style and format of the investment program, ULIPs have a lock-in term ranging from three to five years. Mutual funds typically have a one-year lock-in period; however, in other circumstances, such as ELSS, the lock-in term is three years.

Investment objective

A mutual fund is a purely financial instrument with the only purpose of producing wealth and the ability to create decent long-term returns. ULIPs, on the other side, are principally insurance-plus-investment products with the added benefit of being market-linked investments.


ULIPs are extremely complex products that provide a combination of risk protection and investment. These have a less clear framework in terms of underlying expenditures and asset allocation. Mutual funds are quite transparent regarding the fees they charge and the holdings they have in their portfolio.

Tax Breaks

Investment in ULIPs is entitled to Income Tax breaks under Section 80C of the Income Tax Act of 1961, which means that you may claim tax breaks of up to Rs.1.5 lakh per year on your ULIP investment. Mutual funds, on the other hand, only give a tax deduction for ELSS investments. Investment in any other mutual fund plan will not give tax benefits, and redemptions will be taxed according to the appropriate tax bracket.


Mutual funds have the advantage of cheap fees and expert management. SEBI has set a maximum expense ratio of 1.05 percent for mutual funds, but there is no such restriction for ULIPs. The fees for ULIP programs might be significantly greater than those for mutual funds.

Risk Cover

ULIPs include an insurance policy that pays out the sum promised to the policyholder’s spouse and kids if the insured dies within the plan’s term. In the context of mutual funds, there is no risk protection in the form of insurance. You must get a separate insurance policy and pay an extra premium if necessary.

Which is Better Investment? ULIP or Mutual Fund?

Taking a decision to invest in mutual funds or ULIPs is in your hand. Investor should assess their financial requirements while purchasing any investment product. The best investment alternative is one that corresponds to the investor’s financial objectives, risk tolerance, and investment term. For example, if assets must be liquid, one should explore mutual funds, while ULIPs have a minimum lock-in duration of 5 years. In fact, not every mutual fund is flexible, and tax-advantaged mutual funds (ELSS funds) have a three-year lock-in period. If a person is searching for both insurance and wealth building, he or she might better try investing in ULIPs.

There are times in life when you wish to have a large quantity of money. These can include the purchase or construction of a home, your kid’s college education and wedding, and your retirement life. You should discover the routes where your investment will create the maximum returns according to on your risk tolerance, taking inflation into account. 

The stock biz has the ability to give the largest returns of any investment strategy, but the risk is rather considerable. There are a number of methods to invest in equities while keeping your long-term objectives in mind. Even though both mutual funds and ULIPs are two of the most common investment alternatives, ULIPs can offer you better results compared to mutual funds based on the aforementioned factors.   

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