Mutual Funds vs ULIP

The money of several investors is managed by an AMC (asset management company) through a financial vehicle known as a mutual fund. The funds that have been raised are then invested in a variety of products, including bonds, stocks, money market instruments, etc. The performance of these underlying securities directly relates to the success of your mutual fund scheme.  A wise investing plan can help you build wealth and protect the financial future of your family. Mutual funds and ULIPs (unit-linked insurance plans) are both popular investment options for those seeking long-term wealth accumulation. Comparing investments in mutual funds with ULIPs, however, is like comparing apples and oranges. Continue reading to learn more about the differences between mutual funds and ULIPs.

What is a Mutual Fund?

Mutual funds are collections of investments that are overseen by experts called fund managers. It is comparable to getting on a bus when the driver drives everyone to a specific location. In this case, the bus is a mutual fund program, the driver is the fund manager, and the passengers are the investors. Fund managers are professionals in mutual funds who decide on the proper asset allocation based on their extensive understanding of the intricacies and volatility of the financial market.

How do mutual funds work?

Mutual funds operate by combining the funds of numerous investors. Following that, stocks, bonds, and other securities are bought with that money. Mutual funds give investors immediate diversification (and a lowered risk level) because they invest in a variety of businesses. Investors in mutual funds participate in the fund’s gains and losses.

Index funds and ETFs are two forms of passive-investing mutual funds that you have probably heard of before. However, there are also mutual funds that are actively managed. These are mutual funds that are managed by investment professionals who decide which stocks to acquire and sell based on the fund’s objectives.

While beating the market consistently over the long term is difficult to achieve, actively managed mutual funds typically strive to do so, whereas passively managed index funds, for instance, try to merely mirror the market’s performance. For instance, an S&P 500 mutual fund would invest in a very small portion of each of the S&P 500 firms in an effort to mimic the performance of the S&P 500 stock market index.

With mutual funds, investors have a wide range of options for trying to increase their money, including equities funds, fixed-income funds, and funds that provide both (balanced funds). There are many more different funds to choose from within these categories. For instance, “sector funds” let you invest in a particular field, like clean energy, while “growth funds” let you concentrate on businesses that will increase in value.

What is ULIP?

Investment and insurance are combined in a unit-linked insurance plan or ULIP. ULIPs are insurance contracts that give investors the chance to build wealth while also giving them the security of a life insurance policy.A portion of the payment for ULIPs is used to provide the investor with life insurance coverage. The remainder is combined and invested in debt, equity, or a combination of the two to contribute to long-term wealth creation.

How ULIP works?

A Unit Linked Insurance Plan (ULIP) is a special type of investment vehicle that also offers life insurance protection. ULIPs enable you to build money for your long-term goals, including your dream home, your child’s education, your retirement, and more, through systematic investing and market-linked returns. Through a life cover, it also guarantees that your objectives are met even in the event of an unanticipated circumstance.

Depending on your risk tolerance, ULIPs provide you the option to invest your money in a variety of equities or debt funds. The returns are tax-free under Section 10(10D) of the Income Tax Act, 1961, even though the premiums you pay are deductible from your taxable income under Section 80C#. ULIPs are a triple win since they provide financial security for your family, capital growth, and tax benefits.

Here’s a detailed explanation of how ULIPs function to give you additional value and the aforementioned advantages.

  • You must choose the level of life insurance, premium payment option, premium amount, and policy duration to match your goals for financial security and savings before you may participate in the capital market with ULIPs.

  • Your choice of an upfront, lump sum payment or recurring payments on an annual, half-yearly, or monthly basis, as well as the frequency of the premium installments, can be made at your convenience.

  • Your life insurance is paid for in part with your premium.

  • Depending on your selections, the remainder of your premium is invested in the stock market using equity, debt, or hybrid funds.

  • Equity invests your funds in stocks. Debt funds invest your money in bonds, treasury securities, and other safe investment vehicles. With the stability of debt funds and the high return potential of equities, hybrid funds strike a compromise.

  • The value of your coverage is determined by the capital put in these funds. Your possibilities of earning bigger returns increase as you invest over a longer period of time.

  • Your nominee will receive the sum assured in the event of an unfortunate event during the policy term to realize their ambitions.

Gains from Mutual Funds

  • There are numerous flexible withdrawal alternatives in mutual fund systems. Investors can therefore always liquidate the fund.

  • It lowers the risk associated with investing in market-linked funds, which enables investors to create a diversified portfolio.

  • The entire portfolio of investments is managed by a professional investor known as a fund manager.

  • Tax-saving mutual funds have a three-year lock-in term.

Advantages of ULIPs

  • ULIPs offer both life insurance coverage and the advantages of investment.

  • Investors can easily reach their future financial goals thanks to the policy’s 5-year lock-in duration.

  • Following the end of the lock-in period, a partial withdrawal from the investment is permitted.

  • Under both the old and current income tax structures, ULIPs provide a number of tax advantages.

Difference Between Mutual Funds and ULIP-

It would help if you first comprehended the differences between ULIPs and mutual funds to acquire some perspective on them. The following are some key distinctions between ULIPs and mutual funds.

1) Investment Objective

A mutual fund is a pure investment product with the only purpose of generating wealth that has the potential to produce respectable returns over time. However, ULIPs have the advantage of being a market-linked investment and primarily an insurance product.

2)Return on investment

Since ULIPs invest in equities, debt, or a combination of the two, their returns can fluctuate. Depending on the scheme chosen, mutual fund returns can also vary and might be low or high. Mutual fund minimum returns are not guaranteed.

3) Lock-in period

Because ULIPs are insurance products, insurers set a lock-in term for these investments, typically five years. Before this lock-in period expires, investors cannot redeem their investments. Most mutual funds, particularly open-ended mutual funds, do not, however, except ELSS funds, which have a three-year lock-in period.


By providing upfront information on fund allocation, ULIPs have become much more open due to recent regulatory changes enacted by the IRDAI. Mutual fund institutions are required to provide a thorough report on the investments made by mutual funds. The watchdog for the financial markets, SEBI, has directed fund houses to give specific details regarding asset allocation, portfolio holdings, active fund manager(s), fees charged, etc., concerning various schemes.

5) Taxation

Depending on the holding duration, equity funds are subject to LTCG (long-term capital gains) and STCG (short-term capital gains) taxes of 10% and 15%, respectively (with any surcharge and cess). After indexation, the LTCG tax rate for debt mutual funds is 20% (plus any applicable surcharge and cess), whereas the STCG tax is determined by the investor’s income tax bracket. Under Section 80C of the IT Act, 1961, equity-linked savings scheme (ELSS) funds are eligible for a tax deduction of up to Rs. 1.5 lac.

Tax on ULIPs: Section 10(10D) of the Income Tax Act, 1961 provides that returns on ULIPs are tax-free.

6) Expense

An expense ratio, also known as a professional management fee and operational fee, is incurred when investing in mutual funds. Some mutual funds further impose an exit load or fee for quitting the program. The fees assessed for ULIPs include premium allocation, fund management, administrative, and mortality fees.

7) Risk cover

If the policyholder’s untimely passing, nominees are compensated for the amount protected under ULIPs. Mutual funds, on the other hand, transfer the investments to the nominee.

8) Ideal time to invest

Under the following conditions, mutual funds are the best option for investments:

  1. If one wishes to invest for either a short-term or long-term objective

  2. If somebody wishes to increase your fortune

  3. If someone is searching for decent returns on investments:

Under the following conditions, ULIPs are the best investment option-

a)    If someone wants to make an investment that will reduce their taxes

b)    If someone wants to get life insurance,

c)    If a person intends to invest for the long run.

ULIP VS. Mutual Fund

The following table compares unit-linked insurance policies and mutual funds in further detail:

 ULIPMutual Fund
PurposeTo create wealth through investing as well as to avail a life insurance coverTo create wealth through investing
Regulatory bodyInsurance Regulatory and Development Authority of India (IRDAI)Securities and Exchange Board of India (SEBI)
policy termLong-termShort-term, medium-term, or long-term depending on one’s financial goals
Lock-in periodULIPs have a lock-in period of 5 yearsMost open-ended mutual funds do not have any lock-in period. Few exceptions are ELSS funds, children’s funds, retirement funds, etc.
Tax benefitsPremiums paid towards ULIPs are tax-exempt up to Rs. 1.5 lac under Section 80C of the Income Tax Act, 1961. Furthermore, the maturity amount is tax-free under Section 10(10D) of the Income Tax Act, 1961Equity-Linked Savings Scheme (ELSS) funds qualify for a tax deduction of up to Rs 1.5 lac under Section 80C of the IT Act, 1961

The table mentioned above is merely displayed, for example, and understanding. Mutual fund investments generally involve greater risks. Mutual funds do not promise or guarantee minimum returns.

Which is better? Mutual Fund or ULIP?

The investor alone decides whether to purchase ULIPs or mutual funds. Investor should evaluate their needs before investing in any instrument. The best investment choice is one that fits the investor’s financial objectives, risk tolerance, and time horizon for the investment. For example, if investments must remain liquid, one may want to think about investing in mutual funds rather than ULIPs, which typically have a minimum lock-in term of five years. Of course, not all mutual funds are liquid, and ELSS funds with tax benefits have a 3-year lock-in period. On the other hand, if one is interested in both insurance and wealth creation, one may want to think about investing in ULIPs.


In essence, while mutual funds’ main objective is wealth building, ULIPs’ main goal is to provide life insurance for investors. Good luck with your investment decisions!

There are several occasions in life that you need a sizable chunk of money. These include home purchases or construction, child marriage and higher education, and retirement. You must determine the investment opportunities that will yield the maximum returns given your risk tolerance while taking the rate of inflation into account.

Among all investing options, stock market investments have the potential to yield the largest returns, but the risk is moderately significant. You can invest money in the equity markets using a variety of methods while balancing your long-term objectives. Mutual funds and ULIPs are two of the most popular options among investors.

The information provided here does not purport to be comprehensive disclosure of all material provisions of the Income Tax Act of 1961, nor does it purport to be either tax or legal advice. Investors are urged to carefully read the prospectus and get professional advice regarding any specific legal, tax, and financial implications of their investment or participation in the program.