Mutual Fund Vs Ulip – What’s The Difference Between Mutual Fund And Ulip?

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  • 01 Mar 2024
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.

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.

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).

The table captures the key differences between ULIPs and mutual funds on various parameters:

Parameters ULIPs Mutual Funds
Offered byLife insurance companies have ULIPs as one of their core products.Asset management companies (AMCs) offer mutual fund investments.
Lock-in periodULIPs 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 bodyThe Insurance Regulatory and Development Authority of India (IRDAI) regulates ULIPs.The Securities and Exchange Board of India (SEBI) regulates mutual funds.
PurposeULIPs serve the dual purpose of life insurance and wealth creation.Wealth creation is the primary goal of mutual funds.
CostsULIPs 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 facilityULIPs 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 benefitsULIPs 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 benefitsPremiums 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 optionsULIPs 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.

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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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.

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.

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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