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Are ULIPs Better Than Mutual Funds?

Updated On Dec 29, 2021

Both ULIPs and mutual funds enable profit maximisation by allowing investors to invest in a variety of asset classes such as equities, hybrid, debt, and money market instruments. Aren't they similar in sound? However, both functionally and structurally, they are extremely different! You can promote ULIPs to your clients as a viable investment option. If properly managed and tax-efficient, ULIPs can produce excellent long-term returns. Make sure your clients understand the relative benefits and drawbacks of both tactics so they can make an informed selection.

Are ULIPs Better Than Mutual Funds?

We've tried to highlight the differences between Mutual Funds and ULIPs in this article. We've tried to compare these two investment products line by line to help you understand how they work in practice.

1. Insurance Cover

A Unit-Linked Investment Plan (ULIP) is a combination of an investment and an insurance product. The amount of life insurance you have depends on how much you spend on premiums. In the event that the holder passes away, the nominee receives the sum assured or the fund value, whichever is greater. Mutual funds, on the other hand, are pure investment vehicles that do not include any life insurance.

2. Fees And Charges

In the case of a ULIP, premium allocation charges are used to put a portion of the premium into life insurance. There are other charges for mortality, administration, and fund management. Year after year, the fees decreased. Charges have been decreased as a result of SEBI's modifications, resulting in a positive return. Mutual funds, on the other hand, impose a fee for administering and managing the funds, which is usually less than 2.5 percent. ULIPs have greater charges than mutual funds, hence mutual funds are the clear winner.

3. Risk Element

The risk element in a ULIP is quite minimal because it is a combination of investing and insurance. You can select the asset class based on your risk tolerance. Some assurers have begun to provide ULIPs with capital protection, which ensures that your principal investment is protected. Even though mutual funds are market-linked, your risk is spread out because you are not assuming a single risk. Depending on your risk appetite, you can invest in a variety of funds. If you want a higher return, you should invest in equity funds, which are riskier than ULIPs. Here, a ULIP triumphs.

4. Time Frame

The lock-in period for ULIPs is five years. As a result, you are not permitted to leave during this period. ULIPs are a great way to invest for long-term financial goals. Mutual funds are offered for a variety of time horizons to help you meet your short- to medium-term financial goals. Except for the ELSS schemes, there is no gestation time.

5. Flexibility

In terms of flexibility, ULIPs are more attractive to investors. Long-term investors have the most flexibility with fund switching, premium redirection, top-ups, and partial withdrawal. You can also specify the length of time. ULIPs, on the other hand, have a 5-year lock-in period because they are designed for long-term investing. Both open-ended and closed-ended mutual funds are available. Most are open-ended, allowing the investor to enter and depart at any moment depending on the circumstances. There is no such thing as a lock-in time unless you invest in an ELSS fund, which has a 3-year lock-in period and offers a tax benefit. You can move mutual funds as well, but only within the same fund house.

6. Taxation

Section 80C of the Income Tax Act allows you to invest in ULIPs and receive a tax benefit. Section 10 (10D) of the Internal Revenue Code exempts maturity benefits and any qualified partial withdrawals from taxation. Other than ELSS funds, no other mutual funds offer tax advantages under Section 80C. ULIPs are more tax-efficient than other types of insurance.


Since the introduction of ULIPs in the last decade, there has been a battle between ULIPs and mutual funds. The benefits and drawbacks of both of these investment options have long been argued by investors and financial professionals. In their investment portfolio, your clients must have a favorite as well. The investing structure of both ULIPs and mutual funds is similar. Money is invested in multiple stocks and shares after being pooled together. The sole difference between a unit-linked plan and a mutual fund is the life insurance coverage. There are numerous variances if you look closely, in addition to this glaring distinction.

You may also like to read - Understanding Switch Fund Options Available In ULIP

Where Will My Money Be Invested In A ULIP?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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