HomeMutual FundMutual Funds vs ULIP: Where to Invest?

Mutual Funds vs ULIP: Where to Invest?

A smart investing plan may help you gain money and ensure your family’s monetary security. ULIPs/unit-linked insurance plans and mutual funds are both appealing investment platforms for long-term wealth accumulation.

Comparing mutual fund investments to ULIPs, on the other hand, is like comparing grapes to cherries.

What is ULIP?

ULIPs are one of the most recent insurance products to be presented to customers. They are insurance policies that provide investors with insurance coverage while also producing income via investment accounts.

In a manner comparable to mutual funds, the insurance company launches a new plan and encourages investors to participate. ULIPs invest in stocks, bonds, and debt securities.

What is a Mutual Fund?

Mutual funds are currently one of the most popular investing solutions. They are basically a trust in which funds from individual and institutional investors with a common goal are pooled to invest in different equities and debt products.

Mutual funds are handled by investment firms, which make investment choices on the investors’ interest. Mutual funds are classified into many categories depending on numerous characteristics such as market type, term, and possible risk.

Mutual Funds vs ULIP

There are times in life when you need a large quantity of money. These can include the purchase or construction of a home, your kid’s college education and wedding, and your retirement life. You must discover the routes where your investment will create the maximum returns according to your risk profile, taking inflation into account.

The equity market has the ability to give the largest returns of any investment strategy, but the risk is rather considerable. There are several ways to invest in the stock markets while keeping your long-term interests and ambitions. Mutual funds and ULIPs are two of the most popular investment alternatives.

Which one is better? 

The investor makes the ultimate choice to invest in mutual funds or ULIPs. Here, an investor must assess their funding requirements before investing in any product. The best investing alternative is one that corresponds to the investor’s monetary objectives, risk tolerance, and investment term.

For example, if assets must be liquid, one should explore mutual funds, while ULIPs have a required lock-in duration of 5 years. Not all mutual funds are liquid, and tax-saving mutual funds have a three-year lock-in term. If a person is searching for both coverage and fund building, he or she might try investing in ULIPs.

Factors to Think When Choosing ULIP or Mutual Fund

1. Investment Scope

Mutual funds are one of the popularly available investment options. But, in comparison, ULIPs have the advantage of delivering financial rewards as well as life coverage in a single payment.

2. Investment Returns

A skilled financial adviser oversees mutual fund schemes and ULIP investments. As a result, the rewards in each of these paths can be substantial. Yet, the risks associated with mutual fund schemes are rather substantial. If the investments fail, the investor will receive a poor return in comparison to the cash they invested. However, even if the ULIP returns are poor, your children might still profit from life insurance.

In contrast, the return on investment for ULIPs is somewhat lower. This is due to the fact that just a portion of the premium gets invested in the market. Furthermore, whether the investment is successful or not, ULIPs guarantee a ‘sum guaranteed.’ 

3. Investment Flexibility

You can send your cash between various market funds based on the risks tolerance at any point throughout the period of the ULIP.

For example, if you want to choose a secure investment option, you can invest in balanced or debt funds. But, if you choose to raise your investing risk at any time, you can shift your money to a stock fund. The main opportunity offered by mutual funds is that the investor understands whether they are investing in equity or debt-oriented funds.

Furthermore, for smarter financial management, you can move your mutual funds from one open-ended plan to the other in the same investment company.

4. Tax Benefits

Regardless of the kind of ULIP scheme you pick, the premium investments are eligible for income tax breaks per Section 80C of the Income Tax Act.

Under Section 10 of the Income Tax Act, ULIP tax savings are also applied to the payouts at maturation or the ‘sum assured’ provided to the beneficiary following the unexpected death of the insured within the ULIP term.

It should be noted, however, that ULIPs issued after February 1, 2022, would be considered as investment income if the yearly premium paid exceeds Rs. 2.5 lakh.

At maturation, such insurance will be taxed at a rate of 10%. Tax breaks are not available for all mutual funds.

5. Expenses

When investing in a ULIP, you must evaluate a variety of expenses, including premium allocation costs, administration costs, investment management expenses, mortality costs, and so on. It should be noted, though, that liquid mutual funds have no entrance or exit fees. This means you may cash out your assets and have the funds sent into your bank in a few hours.

Some debt mutual funds, on the other hand, charge exit fees. However, you can avoid the price by matching your investment duration with the time for which the fund charges an exit fee.

6. Transparency

As the preceding statement indicates, ULIPs have a large number of underlying expenditures. There aren’t many ULIP companies that will tell you upfront about these fees. But, as a result of recent regulatory developments, ULIPs are now more open and disclose upfront information on money distribution.

In the event of mutual funds, the money managers present you with a thorough report on the investments they make in your favor. As a result, you have a far better understanding of how your money is getting used.

7. Liquidity

ULIPs have such a five-year lock-in duration. As a result, you must continue investing in the scheme for the next 5 years. If you have to cancel the insurance, you may have to spend the submission fees, which might be costly. Mutual funds allow you to enter and quit the scheme based on your investing goals.

Bottom Line

It is extremely likely that each investor has a set amount of money to invest. As a result, it makes perfect sense to handpick the finest investment choice and make investments with the goal of reaping the largest potential profits. 

ULIPs are comparatively a wonderful investment alternative since they have built-in insurance coverage, tax advantages, loyalty advantages, and smooth switching possibilities. Mutual funds, by the way, have a lot of attraction since they offer superior performance, fewer fees, more fund options, and no lock-in period.

So the decision between ULIPs and Mutual Funds boils down to knowing how each product or service fits into your investing strategy.


Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


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