Difference Between ULIP and Mutual Fund
- 5 min read•
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- Published 18 Dec 2025
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.
Features of ULIPs
ULIPs offer flexibility in switching between equity, debt, or balanced funds, helping you align your portfolio with market conditions and your risk appetite. They come with a lock-in period of five years, promoting disciplined, long-term investing that helps investors like you ride out short-term market fluctuations. ULIPs also provide tax benefits under Sections 80C and 10(10D) of the Income Tax Act, making them an efficient avenue for wealth creation and protection. Policyholders can choose the premium amount, policy term, and investment strategy that align with their goals.
Additionally, ULIPs ensure fund transparency through , regular performance updates and detailed account statements. They also offer, and optional riders like critical illness or accidental death for enhanced protection.
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).
Features of Mutual Funds
Mutual funds are managed by professional fund managers who make investment decisions based on the fund’s objective. They offer high liquidity, allowing you as an investor to redeem units easily, usually within 1–2 business days. They are available in various categories like— equity, debt, hybrid, and more —to suit different risk appetites and financial goals.
As an investor, you can start with low amounts through SIPs and benefit from diversification, reducing risk exposure. Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), ensuring transparency and investor protection. Returns vary based on market performance, and you can track NAVs and holdings regularly for better decision-making.
Difference between ULIPs and mutual funds
The table captures the key differences between ULIPs and mutual funds across various parameters:
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 funds 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. |
Considerations When Selecting ULIPs
When choosing a ULIP, evaluate the policy’s charges, such as premium allocation, fund management, and mortality charges, as these can impact your returns. Assess the insurer’s credibility and claim settlement ratio to ensure reliability. Understand the fund options available equity, debt, or balanced and choose based on your risk appetite and investment horizon.
ULIPs have a minimum lock-in period of five years, so make sure you a're comfortable with the commitment. Flexibility to switch between funds is an added benefit, so check if the plan allows free switches. Review the policy’s life cover component to ensure adequate protection for your family.
Also, consider the plan’s track record and performance consistency of the investment funds. Lastly, ensure the plan offers transparency in fund updates and policy features, and check if riders are available to enhance overall coverage based on your needs.
Considerations When Selecting Mutual Funds
When selecting a mutual fund, start by aligning the fund’s objective with your financial goals and risk tolerance. For long-term growth, equity funds may be suitable; for stability and income, debt funds are preferable. Evaluate the fund’s historical performance over 5-10 years, focusing on consistency rather than short-term gains. Check the fund manager’s experience and track record, as their strategy greatly influences performance.
Review the fund’s expense ratio, which affects your net returns -lower is generally better. Understand the fund’s portfolio composition and diversification level to gauge exposure to different sectors and asset classes. Also, compare the fund’s performance with its benchmark and peers. Ensure the fund is from a reputed AMC and regulated by SEBI. Lastly, assess liquidity, exit loads, and tax implications before investing to ensure the fund fits your time horizon and return expectations.
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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