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What Are The Difference Between ULIPs And Mutual Funds?

Published On Nov 16, 2021

A mutual fund is an economic instrument in which a property consulting firm handles the funds of many investors. The proceeds are then invested in a variety of products, including bonds, stocks, and money market instruments, among others. Your mutual fund scheme's performance is inversely related to the performance of these underlying securities.

Fund managers are mutual fund professionals with an in-depth understanding of the financial markets' intricacies and volatility who make suitable asset allocation decisions.

A unit-linked insurance plan (ULIP) combines investment and insurance into one package. ULIPs are life insurance policies that provide an investor with the opportunity to build wealth while also giving the security of a life insurance policy.

A portion of the premium for ULIPs is used to provide a life insurance policy to the investor. The remainder is pooled and invested in debt, equity, or a combination of both to help develop long-term wealth.

Difference Between ULIPs And Mutual Funds

To get a better understanding of the differences between ULIPs and mutual funds, you must first know what they are. Some key distinctions between mutual funds and ULIPs are listed below:

1. Risk Cover

In the event of a policyholder's premature death, nominees are compensated for the sum assured. Mutual funds, on the other hand, transfer their investments to the nominee.

2. The Ideal Time To Invest

In the following situations, mutual funds are an excellent investment option:

  • If you really want to engage for the long term or short term,
  • If you want to increase your money, you can hire someone to do it for you.

Under the following circumstances, ULIPs are the best investment option for someone looking for decent returns on investments:

  • If you want to save money on taxes, here is the place to go.
  • If you're looking for a life insurance policy, there are several options available.

3. Transparency

ULIPs have become much more transparent as a result of recent IRDAI regulatory changes; they now offer upfront information on money allocation. Fund houses must produce a full report on mutual fund investments in the case of mutual funds. SEBI, the regulator of financial markets, has encouraged fund houses to give full information on asset allocation, portfolio holding, active fund manager(s), fees charged, and so on, in relation to various schemes.

4. Taxation

Taxation on mutual funds: Depending on the holding period, equity funds are subject to LTCG (long-term capital gains) and STCG (short-term capital gains) taxes of 10% and 15% (with appropriate surcharge and cess). After indexation, the LTCG tax on debt mutual funds is 20% (with appropriate surcharge and cess), whereas STCG tax is based on the investor's tax bracket. Under Section 80C of the Indian Income Tax Act, 1961, ELSS funds are eligible for a tax deduction of up to Rs 1.5 lac.

Section 10(10D) of the Income Tax Act of 1961 exempts ULIP returns from taxation.

5. Expense

When you invest in mutual funds, you pay a professional management charge as well as an operating cost, which is known as an expense ratio. Some mutual funds levy an exit load, which is a fee for exiting the fund. Premium allocation charge, fund management charge, administration charge, mortality charge, and other charges are all applied when it comes to ULIPs.

6. Investment Objective

A mutual fund is a type of investment that exists only for the purpose of generating wealth and has the potential to deliver decent long-term returns. ULIPs, on the other hand, are principally insurance products that also happen to be market-linked investments.


It is up to the individual to decide whether to invest in mutual funds or ULIPs. An investor should evaluate his or her financial needs before investing in any instrument. The best investment option is one that matches the investor's financial goals, risk profile, and time horizon. If liquidity is required, for example, mutual funds can be used because ULIPs have a 5-year minimum lock-in term. However, not all mutual funds are liquid, and tax-advantaged mutual funds (ELSS funds) have a three-year lock-in period. ULIPs, on the other hand, are a good option for people looking for both insurance and wealth growth. In a nutshell, ULIPs' major goal is to ensure the investor's life, whereas mutual funds' primary goal is to create money. Choose wisely, and good luck with your investments!

Also read - Should I invest in ULIPs?

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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