5 Differences Between ULIPs and Mutual Funds


Unit-Linked Insurance Plans (ULIPs) and mutual funds are popular investment instruments available in the market today. Those who are considering to invest their hard-earned money are in a big dilemma of whether to invest in ULIPs or mutual funds. ULIPs and mutual funds are distinct investment avenues that can facilitate goal-based savings. However, if you are confused about their features and benefits, we have explained the significant differences between ULIPs and mutual funds over here.


ULIP is a market-linked insurance plan that offers insurance and investment components under a single scheme. A part of the premium gets invested in the financial market to help you earn profitable returns.You get to invest in multiple equity and debt fund types.

Mutual funds 

Mutual funds are an investment plan where a large amount is pooled from various investors and is then invested in multiple securities. Professional funds managers who have extensive knowledge about securities, like bonds, stocks, and other instruments handle these funds.

Distinguishing factors between ULIPs and mutual funds

Here, we have compared ULIPs and mutual funds based on aspects, like:

  • Product type

ULIP is a kind of life insurance plan with an investment component. Here, policyholders can invest a part of the premium in equity, debt, or a mixture of both types of funds. The Insurance Regulatory and Development Authority of India (IRDAI) controls the functioning of ULIPs. Conversely, a mutual fund is purely an investment plan that does not provide life cover. The Securities and Exchange Board of India (SEBI) regulates the working ofmutual funds.

  • Risk and returns 

Though both investment instruments are risky, ULIPs comparatively have a lower risk when compared to mutual funds. It is because ULIP is an insurance product. Besides this, ULIP allows you to invest in the fund of your choice as per your risk-bearing capacity. One of the best ULIP benefits is switching from one fund to another based on the market conditions. Therefore, you have the opportunity to maximize the returns on investment. ULIP returns in 10 years can be higher as compared to mutual funds, as it can grow your wealth exponentially via the power of compounding. Whereas, in mutual funds, your money is directly invested in the equity market. Therefore, it is considered as a high-risk investment alternative due to the inconsistency or volatility of the equity market.

  • Charges

ULIP has numerous costs, like premium allocation charges, fund management charges, policy administration charges, and discontinuation charges, among others. On the other hand, mutual fundscharges are anywhere between 1% to 2.5%, which is low compared to the expenses associated with ULIP.

  • Tax benefits 

By investing in ULIP, you can claim a maximum deduction of INR 1.5 lakh per year under Section 80C of the Income Tax Act, 1961, for the premium paid. In the case of mutual funds, only Equity-Linked Savings Scheme (ELSS) up to a long-term capital gain of INR 1 lakh is tax-free.

  • Lock-in period 

ULIPs have a mandatory lock-in tenure of five years. It is because this product is designed, keeping in mind its insurance component. Mutual funds donot have a compulsory lock-in duration like ULIPs. Only ELSS has a lock-in term of three years.

Now when you know the unit linked insurance plan meaning and what mutual funds are, it is time to select a suitable investment option that can help you achieve your long-term financial goals. ULIP benefits outnumber the ones that mutual funds offer. Moreover, ULIP returns in 10 years can be considerably higher, which makes it an ideal investment instrument for the long term.

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