ULIP VS Mutual Fund: Which Offers Superior Returns? Which Is The Preferable Choice

by SMCIB on Monday, 18 March 2024

ULIP VS Mutual Fund: Which Offers Superior Returns? Which Is The Preferable Choice

A sound investment strategy can pave the way for wealth accumulation and securing your family’s financial future. ULIPs (Unit Linked Insurance Plans) and mutual funds both offer attractive avenues for long-term investment growth. However, contrasting mutual fund investments with ULIPs is like comparing the speed of a race car to the comfort of a luxury sedan.

Continue reading to uncover the differences between ULIPs and mutual funds.

What Is A Mutual Fund?

Mutual funds are a popular way for people to invest their money. They are managed by SEBI-registered companies called Asset Management Companies (AMCs). These companies handle money from many different investors. Basically, a mutual fund is like a big pot of money collected from lots of people. The company then invests this money in different financial instruments like bonds, stocks, and other financial instruments. The performance of a mutual fund depends on how well these investments do. Sometimes, the returns are high, and sometimes they're not so great, depending on how the financial market is doing.

The people who manage mutual funds, known as fund managers, are experts in understanding how the financial market works. They make smart decisions about where to put the money based on what's happening in the market. Their main goal is to make as much money as possible for the people who invest in the mutual fund.

Overall, mutual funds are a good choice because they allow you to invest in a variety of assets managed by experts who know what they're doing.

What Are ULIPs (Unit Linked Insurance Plans)?

ULIP stands for Unit Linked Insurance Plan, a type of life insurance that's like a two-in-one deal. It lets you invest your money in financial instruments like stocks and bonds while also providing life insurance cover for your family.

Here's how the investment part of a ULIP works: Your premiums, along with those of other people with ULIPs, are combined into a big pool of money. The insurance company then invests this money in market-linked instruments like equity, debts, balanced funds, etc. You can choose where you want your money to be invested based on how much risk you're comfortable with and what kind of returns you're hoping for.

Each investment option is managed by professionals called fund managers. The money you put in gets converted into units, sort of like shares, based on the market value of the investments on that day. This market value, called the Net Asset Value or NAV, changes every day depending on how the market is doing. So, because the NAV changes every day, the value of your investment, known as the Fund Value, also changes every day. Fund Value = Total Owned Units x Current Net Asset Value.

In simple terms, your money in ULIPs is invested in different places by the insurance company, and the value of your investment goes up or down depending on how those investments perform in the market. ULIPs offer two main benefits -

  1. Maturity Benefit:
    If you complete the policy term, you'll get the maturity benefit. This is simply the total value of your investments on the date the policy ends.
  2. Death Benefit:
    If you pass away during the policy term, your nominee (the person you choose to receive the money) will get the death benefit. This could be either:
  • A fixed amount called the sum assured, or
  • The total value of your investments, whichever is higher.


In Unit Linked Insurance Plans, the sum assured typically corresponds to a multiple of the annual premiums paid, which is commonly set at 10 times the annual premium. However, depending on the specific ULIP product, this multiple can vary and may be set at higher values such as 15 or 20 times the annual premium.

Similarities Between ULIPs And Mutual Funds

ULIPs and Mutual Funds share similarities in various aspects.

Firstly, investment returns play a big role whether you're looking at mutual funds or ULIPs. In both cases, how much money you make depends on the risks involved. Let's break it down: With mutual funds, there are different types. Some invest in stocks, which can bring in higher returns but also come with more risk. Others focus on safer options like bonds, which typically offer lower returns but provide more stability. It's a trade-off between risk and reward.

ULIPs work in a similar way. They also have different options for where your money goes. You might choose a plan that invests more in stocks for potentially higher returns, or one that leans towards safer options for more stability, depending on your risk appetite. So, whether you're thinking about mutual funds or ULIPs, understanding the balance between risk and potential returns is key. It's all about finding the right fit for your financial goals and comfort level.

Secondly, when it comes to transparency, both mutual funds and ULIPs are pretty straightforward. They give you all the details upfront so you know exactly where your money is going. For starters, both mutual fund companies and insurance companies make sure you can easily find out how they're dividing up your funds. They put up daily NAVs (Net Asset Values) on their websites, which basically show you the value of your investment at any given time.

Plus, every month they release fact sheets. These sheets are like a report card for your investment. They tell you how well each fund is doing, what it's invested in, how it compares to a benchmark, and even who's managing it. It's all out there for you to see, so you can make informed decisions about where to put your money. That's transparency in action!

Difference Between ULIPs And Mutual Funds

Here are the key aspects that differentiate ULIPs from mutual funds -




     Mutual Funds

Investment Goals

It offers the combined benefits of insurance and investment, ensuring long-term financial security for your family while providing coverage for unexpected events while the policy is active.

This investment product is designed solely to enhance your wealth over time.


An insurance cum investment plan that keeps your family safe while also helping you grow your money over time.

Provides options for investing your money for both short and long periods to help you achieve your financial dreams.

Governing body

ULIPs are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

Mutual funds are overseen by the Securities and Exchange Board of India (SEBI).

Risk Cover

If you pass away during the policy term, your nominee will receive a payout, either the sum assured or the fund value, whichever is greater. Alternatively, they may receive both the sum assured and the fund value.

If you die unexpectedly, your investments will be transferred to the person you've chosen to receive them.

Lock-in Period

ULIPs generally come with a lock-in period of 5 years.

Most mutual funds don't require you to keep your money locked in for a specific period, except for the Equity Linked Savings Scheme (ELSS), which has a lock-in period of 3 years.

Fund Switching



You can easily switch your investments between equity and debt funds whenever you want, without any taxes charged for making the switch.

In mutual funds, you can switch between different funds. However, if you switch from one type of investment to another, like moving from stocks to bonds, you'll need to sell some of your stocks and buy bonds instead. When you sell stocks, you may have to pay capital gains tax, and there might be additional charges called exit loads. Plus, switching between funds can take some time and isn't immediate.


This part is crucial to consider. ULIPs come with extra costs like premium allocation fees, administrative fees, fund management charges, mortality charges (which are premiums for life insurance coverage) and so on.

With mutual funds, you typically only encounter exit fees and fund management charges. Some mutual funds might also have entry fees.

Partial Withdrawals

You can take out part of your money from the investment post the lock-in-period, and you won't have to pay taxes on it.

You can take out part of your money from the investment, but when you withdraw units from mutual funds, you may need to pay taxes on any profits you've made.

Tax Benefits


You can get a tax deduction of up to Rs 1.5 lakh for ULIP premiums under Section 80C. Also, according to Section 10(10D) of the Income Tax Act, 1961, ULIP returns are tax-exempt if the total premium paid is less than Rs. 2.50 lakhs.

You can't get a tax deduction under Section 80C for any other type of mutual fund except Equity Linked Savings Schemes (ELSS), which have a lock-in period of 3 years. Whenever you cash out investments in mutual funds, you'll have to pay capital gains tax.


Fund Performance

You can easily check, track, and compare the performance of ULIP funds on different platforms like MorningStar, in addition to the insurance company's website.

You can also find the performance of mutual funds on various platforms such as MorningStar, Value Research, and the mutual fund company's website.

Loyalty Additions

Certain products provide loyalty additions. You receive this bonus in the form of extra units when you keep investing with the fund for an extended period, like five years or more. Loyalty additions are typically granted after the premium payment term ends.

Mutual funds don't provide loyalty additions.


Which Is Better: ULIPs Or Mutual Funds?

Deciding between ULIPs and mutual funds depends on your personal preferences, financial goals, how much risk you're comfortable with, and whether you need insurance. ULIPs provide both insurance and investment opportunities, while mutual funds are solely for building wealth. To make the right choice, consider the following factors and consult with an SMC expert who can assist you based on your needs when buying insurance.

Factors To Be Considered Before Choosing Between ULIP And Mutual Funds

Keep in mind the following factors before choosing between ULIP and mutual funds -

  • Investment Goals: It's essential to understand your investment goals. Consider what matters most to you financially – whether it's building wealth, saving for the long term, or a combination of investing and having insurance coverage.
  • Risk Tolerance: Your comfort with risk is crucial in choosing between ULIPs and mutual funds. Consider how much risk you're comfortable with. ULIPs provide market-linked returns and insurance coverage, while mutual funds focus solely on market-linked returns. It's important to assess your comfort level with market fluctuations.
  • Time Horizon: Take into account the duration you'll need to keep your investment locked in. ULIPs typically require a lock-in period, usually around 5 years, whereas many mutual funds don't have a mandatory lock-in, except for certain categories like ELSS. Consider how long you plan to invest before choosing between the two options.
  • Flexibility And Liquidity: Determine how adaptable you want your investment to be. ULIPs may restrict withdrawals during the lock-in period, but mutual funds generally provide higher liquidity, allowing you to redeem your investments at any time.
  • Charges And Fees: Understand the fees involved with both ULIPs and mutual funds. ULIPs frequently include a variety of charges, such as premium allocation charges and mortality charges, while mutual funds generally include fund management fees and exit loads. Compare these fees to determine which choice is the most cost-effective. Understanding the fee structure of each investment vehicle is critical for assessing their cost-effectiveness over the investment period.
  • Tax Implications: Consider the tax benefits of each alternative. ULIPs may provide tax benefits under Section 80C for premium payments and tax-free returns under Section 10(10D), but mutual funds may have various tax implications, such as capital gains tax on redemptions.
  • Fund Switching And Portfolio Management: Learn how to easily switch between funds and investment portfolios. ULIPs make fund switching simple, but mutual funds may require selling and purchasing units, incurring capital gains tax and exit loads.

Summing Up!

Choosing between ULIPs and mutual funds is a significant financial decision that depends on personal circumstances and preferences. ULIPs offer a combination of insurance and investment for a comprehensive financial solution, while mutual funds primarily focus on wealth building. Understanding your investing objectives, risk tolerance, time horizon, and the importance of insurance coverage is crucial in making the right choice.

Considerations such as flexibility, liquidity, costs, tax implications, and portfolio management are all important factors to weigh. Consulting with a financial expert can provide valuable insights tailored to your specific financial situation.

Furthermore, determining which option provides better returns is subjective and influenced by various factors, including market conditions and individual investment plans. By carefully evaluating all factors and seeking professional guidance, you can make an informed decision aligned with your financial goals and objectives.


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