Mutual Fund Vs Ulip – What’s The Difference Between Mutual Fund And Ulip?
Unit-linked insurance plans (ULIPs) and mutual funds are two options for investing in market-linked products. The similarity, however, ends there. ULIPs and mutual funds are distinct financial instruments, each serving different purposes. Knowing the difference between ULIPs and mutual funds can help you make a prudent choice.
What are ULIPs?
ULIPs are life insurance products, combining the benefits of insurance and investment. In ULIPs, a part of the premium paid gives you life cover, while the other is invested in markets for wealth creation. The underlying securities of ULIPs consist of equities, debt, money market instruments etc.
What are mutual funds?
Mutual funds, on the other hand, pool money from different investors and invest in underlying securities comprising stocks, bonds, money-market instruments, gold, etc. Unlike ULIPs, they don’t offer life coverage and are managed by asset management companies (AMCs).
Difference between ULIPs and mutual funds
The table captures the key differences between ULIPs and mutual funds on various parameters:
Parameters
Offered by
ULIPs
Life insurance companies have ULIPs as one of their core products.
Mutual Funds
Asset management companies (AMCs) offer mutual fund investments.
Parameters
Lock-in period
ULIPs
ULIPs come with a 5-year lock-in period, which means you can’t withdraw money from them for five years from the date of investment.
Mutual Funds
Most mutual funds, except equity-linked savings schemes (ELSS), have no lock-in period. ELSS have a lock-in period of 3 years.
Parameters
Regulatory body
ULIPs
The Insurance Regulatory and Development Authority of India (IRDAI) regulates ULIPs.
Mutual Funds
The Securities and Exchange Board of India (SEBI) regulates mutual funds.
Parameters
Purpose
ULIPs
ULIPs serve the dual purpose of life insurance and wealth creation.
Mutual Funds
Wealth creation is the primary goal of mutual funds.
Parameters
Costs
ULIPs
ULIPs have various charges, such as mortality charges, fund management expenses, fund switching charges, etc.
Mutual Funds
Costs in mutual funds are combined under the head of expense ratio, which includes the fund manager’s fee, marketing and distribution fee, etc.
Parameters
Switching facility
ULIPs
ULIPs offer this facility whereby you can switch from one fund to another as per your preference.
Mutual Funds
Mutual funds also offer a switch facility; however it is considered as redemption and fresh investment. Hence, you need to consider tax implications and exit load (if any).
Parameters
Loyalty benefits
ULIPs
ULIPs offer loyalty benefits if you stay invested for a long period by allocating some additional units.
Mutual Funds
Mutual funds offer no such benefits. However, you can benefit from the power of compounding if you stay invested for a long period.
Parameters
Tax benefits
ULIPs
Premiums paid towards ULIPs qualify for tax exemption under section 80C of the Income Tax Act, 1961, under the old tax regime.
Mutual Funds
Only investments in ELSS funds are tax-exempt under section 80C of the Income Tax Act, 1961, in the old tax regime.
Parameters
Fund options
ULIPs
ULIPs have few fund options and come with standard equity and debt variants.
Mutual Funds
Mutual funds offer ample options across different categories such as equity, debt and hybrid.
| Parameters | ULIPs | Mutual Funds |
|---|---|---|
| Offered by | Life insurance companies have ULIPs as one of their core products. | Asset management companies (AMCs) offer mutual fund investments. |
| Lock-in period | ULIPs come with a 5-year lock-in period, which means you can’t withdraw money from them for five years from the date of investment. | Most mutual funds, except equity-linked savings schemes (ELSS), have no lock-in period. ELSS have a lock-in period of 3 years. |
| Regulatory body | The Insurance Regulatory and Development Authority of India (IRDAI) regulates ULIPs. | The Securities and Exchange Board of India (SEBI) regulates mutual funds. |
| Purpose | ULIPs serve the dual purpose of life insurance and wealth creation. | Wealth creation is the primary goal of mutual funds. |
| Costs | ULIPs have various charges, such as mortality charges, fund management expenses, fund switching charges, etc. | Costs in mutual funds are combined under the head of expense ratio, which includes the fund manager’s fee, marketing and distribution fee, etc. |
| Switching facility | ULIPs offer this facility whereby you can switch from one fund to another as per your preference. | Mutual funds also offer a switch facility; however it is considered as redemption and fresh investment. Hence, you need to consider tax implications and exit load (if any). |
| Loyalty benefits | ULIPs offer loyalty benefits if you stay invested for a long period by allocating some additional units. | Mutual funds offer no such benefits. However, you can benefit from the power of compounding if you stay invested for a long period. |
| Tax benefits | Premiums paid towards ULIPs qualify for tax exemption under section 80C of the Income Tax Act, 1961, under the old tax regime. | Only investments in ELSS funds are tax-exempt under section 80C of the Income Tax Act, 1961, in the old tax regime. |
| Fund options | ULIPs have few fund options and come with standard equity and debt variants. | Mutual funds offer ample options across different categories such as equity, debt and hybrid. |
What to choose - ULIPs or mutual funds?
The choice between ULIPs and mutual funds depends on how each fits into your investment plan. If you want the dual benefit of insurance and investment, you can invest in ULIPs. On the other hand, if you wish to build a corpus for different life goals, mutual funds are a better choice. Some financial experts may advise not to mix insurance and investment. Consult a financial advisor who will help you choose either based on your goals and risk tolerance.
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FAQs on difference between mutual funds and ULIPs
Are ULIPs suitable for the long term?
Since ULIPs have a lock-in period of 5 years, they are suitable for the long term. Moreover, you can maximise benefits from ULIPs only when you remain invested for the long term.
Are mutual funds better than ULIPs?
Mutual funds and ULIPs serve different purposes. That said, mutual funds offer more flexibility than ULIPs and potentially better long-term returns, if your sole purpose of investing is wealth creation.
What is the difference between ULIP and ELSS mutual funds?
There’s no insurance component in ELSS funds. Also, while ULIPs have a lock-in period of 5 years, it’s 3 years for ELSS funds.
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