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ULIPs Vs Mutual Funds – Know which is better?

Written by - Akshatha Sajumon

February 12, 2022 9 minutes

Every individual looks to grow his/her wealth to meet certain financial goals or as a retirement fund. There are various forms of investments available in the market that an individual can pick based on the risk and the return associated with the investment. Mutual funds and Unit Linked Insurance Plans are two such investment avenues that are often looked at while looking at long term wealth creation. 

What is a Unit Linked Insurance Plan (ULIP)?

Unit Linked Insurance Plan (ULIP)  is one of the kind insurance products that come with benefits of insurance and investment. To meet the objective of the product, a part of the premium collected is invested in market-linked financial products like equities, debts, etc, and the other part is retained to provide insurance cover. 

Like any other insurance plan, a ULIP gets subscriptions for its plans from the general public. ULIPs are managed by fund managers who take care of investing the sum raised in different market-linked financial products like equities or debt to offer returns and insurance to the subscribers of the plan. The expenses incurred in the management and investing of the fund are deducted from the premium paid by the subscribers.

What is Mutual Fund?

Mutual funds are collective investments from many individual investors which are then pooled and invested to meet in line with the objectives of the fund. These funds are managed by experienced fund managers. Similar to the investment part of the ULIP, mutual funds also invest in market-linked financial instruments like equities, debt, bonds, gold, commodities, etc. 

The returns generated from the investments are distributed among the investors after deduction of fund management and other expenses. 

Mutual funds can be used for different tenures as per your financial needs. There are liquid funds that need a minimum investment tenure of just 7 days to equity mutual funds where you can remain invested for years together until your goal is met. Mutual funds can also be chosen to meet your risk tolerance. While equity mutual funds may suit investors who can assume higher risks, debt funds suit the risk-averse; and balanced funds are ideal for those like a mix of both.

Other than the insurance part, Mutual funds and ULIPs seem to work the same way? Isn’t it? What are some of the differences and other similarities between the two investment products that you should consider while investing? Read on to know more-


Differences between ULIPs and Mutual Funds

As we have understood about the two investment vehicles, let us undergo a comparative analysis of the ULIPs and Mutual Funds:

Risk cover

ULIPs come with an in-built insurance plan that offers the sum assured to the family members or nominees in case the policyholder dies within the term of the policy. On the other hand, mutual funds do not provide any risk cover by way of insurance. An investor is required to buy a separate insurance plan and pay an additional premium for the same if required. However, some mutual fund houses have started providing some insurance cover on select equity schemes. But they are subject to some terms and conditions.

 Transparency and disclosure levels

ULIPs are an insurance cum investment product. The asset allocation, fund expenses have a complicated structure that is not easily understood. Unlike the ULIPs, mutual funds offer comprehensive information on the holding in the portfolio, asset allocation, fund managers, expenses, etc. The rules and regulations concerning mutual fund houses are very stringent as they are regulated by SEBI; hence there is absolute transparency on their part.


ULIPs are locked in for 5 years, before which the investment cannot be redeemed. If the policy is surrendered within 5 years, the money will be transferred into a discontinuance fund, which remains unavailable to the unit-holder. Once the money is in the discontinuance fund, the amount would earn about 3.5% percent for the rest of the tenure. So, an investment in a ULIP fund makes sense only when you can be invested in it for a longer tenure.

In comparison, most mutual funds typically do not have any lock-in period, except tax saving mutual funds, which have a lock-in period of 3 years. This feature makes mutual funds a more liquid investment tool than ULIPs.

Tax benefits

In ULIPs, the premium amount paid towards the plan up to Rs. 1.5 lakhs can be claimed as a deduction in a financial year under section 80C of the Income Tax Act, 1961. Further, in case of a claim, the sum assured paid to the nominee would also be tax-free under section 10(10D) of the Income Tax Act. The proceeds received as a lump-sum (if any) at the end of the term of the plan is also tax-free. 

Similarly, in mutual funds, investment up to Rs. 1.5 lakhs in the ELSS scheme is deductible under Section 80C of the Income Tax Act. But this deduction is not available when you invest in any other mutual fund schemes. 

Also, capital gain tax is applicable on the redemption of mutual funds. Depending upon the period for which the investment has been held, the gains are categorized as short term or long term capital gains. The tax treatment for capital gains varies between categories of funds (equity or debt fund).


In some ULIPs, an investor has the flexibility to decide what portion should be invested and what goes towards life insurance. Further, an investor can switch between the funds, like, equity to debt and vice versa, depending on market performance. This switching can be done multiple times, subject to a specified limit by various insurance companies. There is no tax implication on the amount switched as it does not construe as withdrawal from investments.

Mutual funds do not provide such flexibility and, as a result, an investor cannot switch between the funds. However, switching is permitted between schemes of the same fund house, and this would be treated as a redemption; hence it could attract capital gain tax and exit load.


Investments in ULIPs are considered to be expensive as it is subject to the multiple charges like premium allocation charge, mortality charge, policy administration fee, fund management charge, surrender charge, etc. These charges increase the total expenses deducted from the fund value. Insurance regulatory body IRDAI has set guidelines to put a cap on these different charges but they continue to remain high.

Compared to ULIPs, mutual funds have relatively low charges. Mutual funds are transparent about the fees charged and the portfolio holdings. Moreover, they are capped at a specified level by the Securities and Exchange Board of India. 

Investment Horizon

ULIPS are preferred for creating a healthy corpus over the long term.  Investors should stay invested in ULIPs for at least 5to 7 years to get the best out of their ULIPs.  However, mutual funds offer policies for the short, medium as well as long term. Investors can choose the fund that suits their requirements for funds and investment horizon.

Redemption procedure

An investor can redeem units on the expiry or maturity date of the ULIP. Further, he can surrender his policy and receive the surrender value, as stated in the policy, only after the lock-in period ends. However, in the event of an unfortunate demise of the investor, his nominee will receive the sum assured or the value of the units, whichever is higher. ULIPs also allow partial withdrawals in some funds at periodic time intervals and the units stand reduced to that extent. 

In mutual funds, there is no such lock-in period except ELSS funds so investors can redeem their funds anytime. However, some funds are subject to exit load charges if the redemption is made before a specified time.

Here’s an easy ready reckoner for you to understand some of the differences between Mutual Funds and ULIPs

 Mutual FundsULIPs
PurposeOnly InvestmentInvestment & Insurance cover
ChargesCharges are lowCharges are high
Tax DeductionOnly ELSS investments are eligible for tax deductions. Redemption is subject to Capital Gains TaxThe total investment is deductible under the Income Tax Act.  The amount received at maturity is also tax-free.
Lock-in periodNo lock-in period, except ELSS funds. However, a 1 % exit load is applicable if redeemed within 1 yearA minimum lock-in period of 5 years from the date of the investment
LiquidityLiquidity is high as the investment can be withdrawn anytimeLiquidity is low as there is a mandatory lock-in of five years


Similarities between ULIP and Mutual Funds

Return on Investment

Both mutual funds and ULIPs are market-linked investments and are subject to market risk. Though there are fund managers who look at investing these funds in line with the fund objectives, it is difficult to predict returns. 

Mode of Investment

ULIPs, as well as mutual funds, allow you to invest periodically or in a lump sum. You may opt for yearly/half-yearly/monthly premium payment on your ULIP or go in for a single premium ULIP plans. An equivalent in mutual funds would be the Systematic Investment Plan (SIP) or a lump sum investment. 


Both ULIPs and mutual funds have market exposure, yet they are quite different from each other. An investor looking for a hybrid instrument who looks at having the benefits of insurance and investment in one instrument may opt for the ULIP. 

On the other hand, someone who feels that insurance and investment should be done separately may go for mutual funds for wealth creation and choose an insurance policy, say a term plan, for risk protection. Also, mutual funds may be helpful when you have both short-term and long-term goals.  All in all, the market is full of schemes under both the options and one should choose investment in line with his requirements and goals.


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