ULIP VS Mutual Funds

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  • 06 Oct 2023
ULIP VS Mutual Funds

Key Highlights

  • A ULIP is a type of insurance policy that provides coverage and investment returns at the same time.
  • In mutual funds, money is pooled and managed by professionals. An investor contributes money to the fund, which invests in stocks, bonds, and money market instruments.
  • ULIPs have a five-year lock-in period. While investments in mutual funds are redeemable at any time except for ELSS plans.
  • The returns on ULIPs are lower. This is because ULIPs guarantee a fixed sum regardless of whether the investment plan makes money. Comparatively, mutual fund returns vary with risk.

In mutual funds, money is pooled from many investors to a single portfolio with a variety of different securities. Investors contribute money to this fund, where the fund manager invests in stocks, bonds, and money market instruments. They are offered and managed by asset management companies (AMCs). By investing in it, you can earn a market-linked return and accumulate more wealth over time.

In mutual funds, you can invest through SIPs and lump sums. The SIP mode involves investing regular amounts periodically, weekly, monthly, or quarterly. However, the lumpsum mode involves investing a large amount at once.

ULIPs are insurance policies that offer investors a level of coverage while generating returns through investments. Similar to mutual funds, the insurance company launches a new scheme and invites investors. In ULIPs, equity shares, debt instruments, and bonds are invested.

ULIPs combine insurance products with investment plans. It is possible to invest in equity, debt, or a combination of both asset types. Additionally, you can switch between asset classes when needed.

There are several benefits to ULIPs, including partial withdrawal, several tax benefits, and a choice of life insurance.

The two options appear similar at first, but they are not the same. These are the differences between ULIP and mutual funds. The following are some significant difference between ULIP and mutual funds:

1. Return on Investment ULIPs offer lower returns. The reason for this is that ULIPs guarantee a fixed sum regardless of whether or not the investment plan makes money. As a comparison, mutual fund returns vary based on the level of risk. A mutual fund that invests in equity has the potential to offer higher returns than a fund that invests in debt.

2. Lock-in Period A ULIP is an insurance policy. Therefore, insurance companies determine the lock-in period for such investments before they cannot be redeemed. The lock-in period for ULIPs can range from three to five years, depending on the scheme's nature and structure. In most cases, mutual funds have a lock-in period of one year, but in some cases, like ELSS, the lock-in period is three years.

3. Transparency ULIP are less transparent about underlying expenses and asset allocation. Mutual funds are pretty open about their fees and holdings.

4. Taxation Benefits Tax deductions for ULIP investments are available under Section 80C of the Income Tax Act, 1961. Mutual funds offer a tax deduction only when investing in ELSS. Tax deductions are not available for any other mutual fund scheme, and redemptions are taxed according to the applicable tax bracket.

5. Expenses The benefits of mutual funds include low costs and professional management. In the case of mutual funds, SEBI has capped the expense ratio at 1.05%, whereas there is no such limit for ULIPs. ULIP schemes can charge much higher fees than mutual funds.

6. Risk Cover As part of the policy, ULIPs provide a death benefit to the family if the policyholder dies during the policy term. In contrast, mutual funds do not provide insurance coverage for risks. If necessary, you must buy a separate insurance plan and pay an additional premium.

Here is the table of difference between ULIP and mutual funds for better understanding:

Parameters ULIP Mutual fund
Insurance cover and wealth creation
Wealth creation
Regulatory Body
Insurance Regulatory and Development Authority of India (IRDAI)
Securities and Exchange Board of India (SEBI)
Long term, there may be a 5-year lock-in period
Short, mid and long-term, as per investor
Tax benefit
Tax deductions are available for premiums paid, and tax exemptions are available for maturity amounts
Under section 80C, only ELSS are eligible for tax deductions
Management Expense
Approximately 1.35%
Approximately 2.50%
Payment Mode
The premiums can be paid in regular intervals or a lump sum.
It is possible to invest through SIPs or lump sums.
Ideal investment period
Long term
Long or mid-term. There are also some short-term mutual funds, such as Liquid Funds.
Risk meter
Comparatively secure.
Not secure.
Lock-in period
5 years.
There is no lock-in period for mutual funds, except for ELSS, which has a 3-year lock-in period.

In choosing between ULIP vs. mutual funds, consider the following factors:

  • If you are looking for both an investment choice and insurance coverage, the ULIP might be right for you. However, ULIPs are less adaptable than mutual funds. Although MF plans do not provide insurance protection, they are more flexible.
  • The lock-in period for ULIPs is five years. Except for ELSS plans, mutual funds allow investors to redeem their investments at any time.
  • A ULIP includes premium allocation, mortality, administration, and fund management charges. When buying mutual funds, there is no entrance load. Their only charge is for fund management costs.
  • ULIPs allow you to move funds for free a certain number of times per year. You will be charged for switching once you reach that amount. With mutual funds, however, this is not the case. Whenever you want, you can swap.
  • ULIPs provide comprehensive coverage. A guaranteed sum is provided to the family if the policyholder passes away during the policy period. Mutual funds do not have an insurance plan like that.


There is a difference between ULIP and mutual funds, and therefore, they should not be combined. When searching for pure insurance plans, make sure the policy does not have any investment objectives. For investing your extra income, choose a good mutual fund scheme or an investment plan. Hopefully, this ULIP vs. Mutual Funds comparison will help you make the right decision. Reach out to Kotak Securities for expert guidance if you want to gain more knowledge in the share market.

FAQs on ULIP vs. Mutual funds

Yes. Under Section 80C of the Income Tax Act, 1961, premium payments towards ULIPs and maturity amounts are tax deductible. The maturity payout is also exempt under Section 10(10D). In addition, death benefits paid to the nominee are tax-free.

Mutual fund expense ratios are the operational and professional management fees. The ideal expense ratio is between 0.50% and 0.75%. When investing in mutual funds, you need to consider the expense ratio.

The earlier you invest in mutual funds, the greater the returns you will receive from compounding.

There is no set investment period for mutual funds. It depends on the investors and their financial objectives. Mutual funds do not have a fixed investment term, unlike some mutual funds such as ELSS.

A ULIP investment is considered to be more flexible than mutual funds. As in ULIP you can shift your investments between equity & debt investments.

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