ULIPs vs Mutual Funds- What Should I opt for?

ULIPs vs Mutual Funds

ULIPs vs Mutual Funds- What Should I opt for?


With plenty of investment options available in the market, you have certainly got a source to accumulate wealth over time. Nonetheless, you need to invest in a plan that ensures financial security while offering higher returns.

With plenty of investment options available in the market, you have certainly got a source to accumulate wealth over time. Nonetheless, you need to invest in a plan that ensures financial security while offering higher returns.

ULIP plan and mutual funds are often considered similar to each other; however, each of them comes with their unique features.

But, before you go ahead with these plans, here's an update for you.

Budget 2021 changes in ULIP taxation

Until now, there was a huge difference between the taxation charges in mutual fund vs ULIP. For, any return from ULIPs were tax-free if the premium for the year does not exceed 10% of the sum assured under Section 10(10D). To bring uniformity between mutual funds and ULIPs, the budget 2021 has made some amendments to the Income Tax Act, 1961. And accordingly, any return from a ULIP policy will be treated as a capital gain if the premium paid in a year exceeds ₹2,50,000.

As this change is effective for ULIP policies issued on and after 1st February 2021, so if you already have a Unit Linked Insurance Plan with a premium of more than ₹2,50,000, then rest assured, you are still eligible for tax exemption irrespective of the premium rate.

Now, let's first get a better understanding of what a mutual fund and a Unit Linked Insurance Plan mean.

What are Mutual Funds?

A mutual fund is probably the most popular investment tool in the market. If you are seeking higher returns with diversity in your investment portfolio, then it can be quite a fruitful option. It is primarily funded by shareholders with a common objective to invest in diversified holdings, including equity and debt instruments. There are several types of mutual funds that can be identified basis their duration, risk factor, and type of market. Remember that mutual funds offer a tax-benefit only against investment in ELSS.

What are ULIPs?

Unit Linked Insurance Plan is an insurance product that provides you with an insurance cover and helps you generate returns on the basis of the investment in numerous avenues. Thus, it offers you a tax-deduction claim under Section 80C against the premium paid. The money can be invested in bonds, equity shares, and debt instruments.

Both of the investment tools might seem identical to you at first glance, but there are some differences between the two that you need to know about.

Difference between ULIP and Mutual Fund


Unit Linked Insurance Plans

Mutual Funds


Ideal for long-term plans that provide you with both insurance and investment options.

Meant for general investment purposes for a short to medium duration.

ULIP vs mutual fund returns on investment

The return on investment is low, as the main objective is to offer a definite sum assured.

The return on investment varies on the risk-factor. Though, it is often higher as compared to returns on hybrid investment options.

Regulatory Body

Insurance Regulatory and Development Authority of India (IRDAI)

Securities and Exchange Board of India (SEBI)

Premium money utilization

The premium money is used towards insurance cover, expenses, and investment options.

The premium money is used towards expenses and a diverse set of holdings, such as equity, debt, and bonds.

Tax benefit

Available under Section 80C.

Available under Section 80C against investment in ELSS.

Charges in mutual fund vs ULIP

There is no expense limit to ULIPs. The charges to maintain these plans can be higher than mutual funds.

The expense ratio is capped to 1.05% by SEBI.


ULIPs are a mix of both insurance cover and investment. The structure is less transparent as they comprise asset allocation and underlying expenses.

Mutual funds have a relatively open structure comprising the fee charges and diversified holdings in the portfolio.

Lock-in period

The lock-in period can range from around 3 to 5 years.

The lock-in period is generally one year and can be 3 years for the ELSS scheme.


Insurance cover is guaranteed, but returns on investment are not confirmed.

High risk is involved, but high returns are not always guaranteed.


You are free to decide the proportion of the amount to be invested towards insurance cover and investment equity.

All the money goes towards investment in holdings, such as equity shares, debts, and bonds.

Investment portfolio

The investment portfolio is known only when the insurance company declares its holdings.

The investment portfolio is transparent, as it is declared every quarter.

ULIP vs Mutual Fund

Now, let's understand what you should opt for based on their different features.

• Product type: If you want a life cover that also lets you generate returns on shares and bonds, then go for a ULIP plan. In contrast, mutual funds are advisable if the sole purpose is to generate high returns.

• Risk cover: Again, as ULIPs are insurance products, they ensure that your family receives the sum assured in case of your sudden demise. While mutual funds are investment plans that help you accumulate wealth over time.

• Investment consideration: It's better to invest in mutual funds if you have both long-term and short-term goals. However, you shouldn't choose ULIPs with an investment perspective, as it's primarily an insurance product.

Benefits of ULIPs over mutual funds

Let's take a look at some of the benefits that a Unit Linked Insurance Plan comes with.

• Insurance cover: The biggest advantage of having a ULIP policy is that it offers an insurance cover along with investment options. So, if you die unexpectedly, your beneficiaries can claim for the death benefit.

• Tax-free returns: You can claim tax exemption towards premiums paid under Section 80C. The maturity benefits are tax-free under Section 10(10D) if the annual premiums paid is below ₹2,50,000.

• Long-term investment: As ULIPs also invest your money in the stock market, they help you generate returns for the long-term. Thus, they are ideal to meet your long-term goals, like a child's education or marriage.

Though there is no winner between a ULIP plan and mutual funds, you can always evaluate both the investment tools basis your needs and risk appetite and opt for a product that serves all your requirements.

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