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Top 3 Reasons That Make ULIP Better Than Mutual Funds

Published On Oct 22, 2021

The ability to switch and rebalance is one of the best features of ULIPs. ULIPs allow policyholders to transfer units – whole or partially – from one fund to another without incurring any exit fees or taxes.

When compared to Mutual Funds, this is unquestionably a huge positive for investors who want to time the market and alter asset allocation frequently. Mutual Funds do not provide these kinds of services.
When rebalancing a mutual fund's portfolio from one asset class to another (for example, from equity to debt), one must sell some stock units and buy corresponding debt units. As a result, when you sell units in an equity fund, you'll have to pay capital gains tax.

Top 3 Reasons That Make ULIP Better Than Mutual Funds

Below are the top 3 reasons that make ULIP better than Mutual Funds:

1. Tax Advantages

In any financial product, there are two tax benefits that are normally available. One, the benefit of tax deductions on the invested money under various provisions of the Income Tax Act. Two, the maturity proceeds and capital gains are taxed at a low or no rate.
Both boxes are checked with ULIPs. Section 80C allows you to deduct the premiums you pay for ULIPs, and Section 10 exempts you from paying taxes on the maturity proceeds (10D).

No other Mutual Fund category is eligible for a deduction under Section 80C of the Income Tax Act, with the exception of Equity Linked Savings Schemes (ELSS). S ELSS capital gains, on the other hand, will be taxed like an Equity Fund.

2. Life Insurance Coverage

ULIPs include a life insurance component. ULIPs provide life insurance coverage in addition to investment profits and tax benefits. As a result, ULIPs are a three-in-one financial instrument.

Mutual Funds, on the other hand, are merely investment vehicles with no built-in insurance. For some of their schemes, some Mutual Fund firms have recently introduced a free but restricted insurance plan. These are available as a group insurance cover, but they are few and far between, and they frequently come with a slew of restrictions, such as the SIP's duration, a maximum sum assured, and restrictions such as no break in the SIP, among others. Overall, you will need to purchase life insurance separately as a Mutual Fund investor. A term insurance plan is a good option because it provides a lot of coverage for a low price.

3. Cost-Effectiveness

Between 2004 and 2010, ULIPs used to charge policyholders a variety of fees. Premium allocation charges, policy administration charges, switching charges, partial withdrawal charges, discontinuance fees, surrender charges, and so on were all examples of these expenses.

Because of the high amounts of these fees, only 50-60% of the premium paid by investors was actually invested on behalf of the policyholder in the stock and bond markets. However, thanks to regulators and increased competition from Mutual Funds, a lot has changed in the last ten years.

Most newer ULIPs have been devoid of any predatory charges and are constructed much more simply. Yes, some plans include additional fees, but the most popular and least expensive are online ULIPs, which typically have only two fees: mortality and fund management.


ULIPs are a smart buy since they have established coverage, tax advantages, and loyalty rewards, and they are easy to switch. Mutual funds, on the other hand, have a lot of attraction because they offer better returns, fewer expenses, more fund options, and no lock-in term.

Choosing between ULIPs and Mutual Funds comes down to understanding how each product or service fits into your overall investment strategy.

Take, for instance, your short-term goal of paying off your automobile loan in two years. The greatest investment option in this scenario is one that offers capital protection and the ability to withdraw assets in two years.

Also read - How Can I Use ULIP To Build Wealth?

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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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