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Should I Buy ULIP Or Mutual Funds?

Updated On Sep 18, 2021

A mutual fund is an investment vehicle that permits you to contribute on a broader scale in the capital markets. Consider an equity index mutual fund to better understand this. Thanks to the financial institution, you have ownership in all of the businesses that make up the index at any given time if you invest in an index mutual fund. The growth of your money invested in a mutual fund is determined by the performance of the shares in the fund basket.

A ULIP, on the other hand, allows you to invest in a fund with an underlying basket of equities while also offering life insurance in one package. In a nutshell, a ULIP is a plan with both investing and insurance benefits.

Differences Between ULIP And Mutual Funds

Below are few differences between ULIP Or Mutual Funds:

1. Tax Treatment

Tax benefits are also a key factor in determining where to put your money. There are tax-related issues to ULIPs and mutual funds that you should be aware of before making an investment decision. To encourage people to save, the government offers tax breaks at the time of investing. Investments in ULIPs or tax-saving mutual funds are eligible for a deduction from taxable income up to Rs 1.5 lakh under Section 80C of the Income Tax Act.
It's also important to consider the tax treatment at the time of withdrawal or maturity. At the moment of redemption, mutual funds are subject to a long-term capital gains (LTCG) tax.

2. Withdrawal Of Money

The liquidity of the investment is an important factor to consider when investing. This refers to when your money invested will be accessible for withdrawal if you require it. Mutual funds and ULIPs have drastically differing policies in this area as well. Regular (non-tax-saving) mutual funds allow you to withdraw your funds at any time without penalty, subject to certain fees. You'll have to wait three years before you can withdraw your money from tax-saving mutual funds.

You must have been invested in ULIPs for at least 5 years before you can withdraw your money. Even if you decide to stop investing in a ULIP in the third year, the money you've invested will only be available to you after 5 years from the day you bought the policy.

3. Charges

The prices you pay for any service are also a significant issue to consider. Because the nature of the two financial products in question is so dissimilar, the fees are as well. While a mutual fund's expense ratio just covers fund management and other administrative costs, a ULIP includes not only fund management but also mortality and other charges. The amount you pay to take advantage of the additional insurance benefit in a ULIP is known as mortality costs. 

A ULIP's fund management charges and a mutual fund's expense ratio are so equivalent. ULIPs cannot charge more than 1.35 percent of your assets in a fund in a year, according to existing legislation. It's also worth noting that certain firms may refund your mortality and fund management charges when your policy matures. 

4. Risk Appetite 

What is the maximum amount of investment risk you are willing to take? Your risk tolerance is determined by this. A good combination of stock and debt is frequently recommended by financial consultants. You can have a higher allocation to stock and a lower allocation to debt instruments if you have a high-risk appetite, and vice versa. Both mutual funds and ULIPs give you a variety of options when it comes to combining equities and debt. ULIPs, on the other hand, allows you to transfer between other funds within the same plan if you are unhappy with the performance of your current fund. In fact, some organizations allow you to swap between funds as many times as you like. To achieve the same result in a mutual fund, you may have to exit one and invest in another, resulting in exit load charges and short-term capital gains tax.


ULIPs are a wonderful investment option since they provide built-in insurance, tax advantages, loyalty perks, and easy switching. Mutual Funds, by the way, have a lot of attraction because they offer greater performance, fewer expenses, more fund options, and no lock-in time. So, deciding between ULIPs and Mutual Funds boils down to knowing how each product fits into your overall investing strategy. 

You may also like to read - How to Compare & Buy ULIPs in India?

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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