ULIP vs Mutual Funds – Which is more profitable?

In close competition, ULIPS vs Mutual Funds look alike, but ULIP and mutual funds are altogether different products. ULIP vs Mutual funds provide a range of benefits and payment commitments, lock-in period, features and benefits

In this post, we will have a close look and compare ULIP vs mutual funds on various parameters. Before understanding the difference between ULIP and mutual funds, let’s first catch up with the basics.

What is a Unit Linked Insurance Plan ( ULIP)?

ULIP Meaning: ULIP (Unit Linked Insurance Plan) is a dual-purpose financial product that offers both life insurance coverage and an opportunity to grow your money through market-linked investments. The main goal of a ULIP is to protect your life while aiming to generate good returns by investing a portion of your premium in assets like equity and debt funds.

The premium you pay is divided into two parts — one portion goes towards life insurance coverage and administrative charges, while the other is invested in market-linked funds

Generally, ULIP plans’ tenure ranges from 5 -20 or more years.

Multiple premium payment options are available under ULIP plans. You can choose a ULIP plan based on how you wish to pay a premium, regular premium( pay premium for the entire duration of the plan), limited premium payment and single premium.

Unit linked insurance plans are sold as a wonderful gift bundle to the customers.

Here’s how ULIP works:

1. Premium Split:
   • Part of your premium goes towards life insurance cover.
   • The remaining part is invested in market-linked funds (equity, debt, or balanced funds), like mutual funds.
2. Fund Options:
   • You can choose where your money is invested.
   • ULIPs allow switching between funds (equity to debt or vice versa) depending on your risk profile.
3. Returns:
   • Returns are market-linked, so they vary based on fund performance.
4. Lock-in Period:
   • ULIPs have a mandatory 5-year lock-in.
   • Partial withdrawals are allowed only after this period.
5. Tax Benefits:
   • Premiums paid are eligible for deduction under Section 80C.
   • Maturity proceeds may be tax-free under Section 10(10D) (subject to conditions).

Read more: What is ULIP Plan & How does it works?

What are Mutual Funds?

A mutual fund is a way to invest your money along with others into things like shares, bonds, or other assets. A professional fund manager handles the investment and makes decisions for you.

You can use mutual funds to save for goals like retirement, your child’s education, buying a home, or just growing your wealth over time.

Read more about mutual funds https://bestinvestindia.com/mutual-fund-guide/

How Mutual Funds Work

1. Pooling of Money:
   Many investors contribute money to a mutual fund, creating a large investment pool.
2. Managed by Experts:
   A professional fund manager uses this pool to invest in a diversified portfolio—like stocks, bonds, or other assets—based on the fund’s objective.
3. Units Allotted:
   Investors receive units based on the amount invested and the fund’s NAV (Net Asset Value). NAV is the per-unit price of the fund.
4. Growth & Returns:
   As the underlying assets grow or earn interest/dividends, the NAV increases. This results in capital gains or income for investors.
5. Liquidity:
   Most mutual funds (except ELSS & FMPs) offer easy entry and exit, making them highly liquid.
6. Types of Funds:
   • Equity funds (higher risk, higher return)
   • Debt funds (lower risk, stable returns)
   • Hybrid funds (mix of equity & debt)
   • ELSS (for tax-saving with 3-year lock-in)

ULIPs Vs Mutual Funds – Difference between ULIP & Mutual Fund

ULIP and mutual funds are both investment product which offer  different benefits and suitable for different needs altogether.

Feature	ULIP	Mutual Fund	Term Insurance
Insurance Cover	Yes	No	Yes
Investment	Yes	Yes	No
Lock-in	5 years	3 years (ELSS) or none	None
Charges	Higher (mortality, admin, fund mgmt)	Lower	Low
Flexibility	Moderate	High	N/A

Let’s evaluate both on certain parameters:

# Nature of Product

Unit linked Insurance plans offer a mix of risk cover and investment. These plans provide tax deduction under section 80C. ULIPs are available as a single premium, Limited premium payment and regular premium plans.

Mutual funds do not provide any life cover, but a highly efficient product for wealth creation in the long term. There are a variety of mutual fund options available to cater different needs of the investors.

For tax saving purpose one can use ELSS mutual funds.

#Lock-in Time

ULIPs generally come with a lock-in period ranging from 5 to 30 years, depending on the specific plan.

In comparison, most equity mutual funds have no mandatory lock-in, but if you withdraw within one year, you may incur an exit load as a penalty.

However, Equity-Linked Savings Schemes (ELSS) come with a fixed lock-in period of 3 years.

#Transparency

In ULIPs, the underlying costs and how the funds are allocated, such as the selection of stocks or debt instruments, are generally less transparent than in mutual fund schemes.

#Expenses

ULIP plans are expensive insurance plans because of their high charges as compared to mutual funds. These market linked insurance plan deduct charges like admin charges, mortality charges, fund management charges, miscellaneous charges etc.Because these plans also provide insurance cover along with the investment, thus charges need to be deducted to compensate the cost.

In case of mutual funds the charges are low as compared to ULIP, since mf do not provide life cover with it. The total expense ratio is also regulated from SEBI and kept low.

#Risk Cover( Life Insurance)

As the name suggests ULIP plans provide life cover to the investor while mutual funds do not provide any olife cover to the investor. One has to buy a separate life insurance plan to fulfill the protection needs of the investor.

#Tax Deduction

ULIP investment amount gets a deduction U/S 80C. One can claim deduction of 1.5 lac under section 80C. While all mutual funds do not provide tax deduction U/S 80C.

To get tax deduction U/S 80 C.ELSS Mf can be used.

# Fund Choices ( Asset Class Choice & Switch)

ULIP has 3-6 fund choice options ( different asset classes such as equity, debt, cash market, balanced etc) and investors are free to switch between the asset class without any hassle each year without any charges.

However, more switches are also permitted subject to some charges. While in case of mutual funds, a switch is considered as selling of existing units and purchase of new units, this may attract exit load and capital gain tax.

#Return on Investment

ULIP returns are lower due to high inbuilt charges such as admin charge,mortality charge, FMc etc. While mutual funds provide higher returns as compared to ULIPs.

For additional reading: How to invest lump sum amount in mutual funds?

ULIPs Vs Mutual Funds – Which will give you better Returns?

ULIPs are more suitable for low to moderate risk-takers who want the dual benefit of life insurance and investment within a single plan. They are ideal for individuals willing to stay invested long-term and comfortable with moderate returns in exchange for insurance coverage and structured investing.

Mutual funds, on the other hand, are better suited for investors across the risk spectrum—from conservative to aggressive—who prefer pure investment options without any insurance component.

When it comes to liquidity, mutual funds offer higher flexibility and easier withdrawals, making them a better choice for those who may need quick access to their funds. ULIPs, with their longer lock-in period and lower liquidity, are better suited for disciplined, long-term investors.

ULIPS also allow you to switch between asset classes (equity and debt) within the same plan without tax implications. In contrast, switching between mutual fund schemes typically involves redeeming one fund and purchasing another, which may lead to exit loads and capital gains taxes.

In summary:

But if you seek a combination of insurance protection and market-linked returns, and are willing to stay invested long term, ULIPs can be a more suitable choice.

If your goal is purely investment and maximizing returns, mutual funds are the better option.

Also Read: Top 5 reasons why you should choose Mutual Funds over Insurance

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