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Unit Linked Insurance Plans vs Mutual Funds

Unit Linked Insurance Plan (ULIP)-
Unit Linked Insurance Plans (ULIPs) are inclusive of life insurance along with investment options. Investments are such as stocks, bonds, or mutual funds etc. There are a number of plans and options available in the market to choose from considering your needs and risk aptitude. These are market-linked plans. The following two benefits to invest in ULIPs-

Life Cover- The life insured is covered against the risk of an untimely death. There’s an assured death benefit that is payable to the nominee in case of an untimely death of the life insured. If there’s a rider attached to the ULIP, the nominee receives the rider benefit also. However, the death benefit is usually, the higher of sum assured or the fund value.

Tax Savings- Premiums paid towards the ULIP are tax-free under Section 80C of the Income Tax Act, 1961. The payout received by the nominee is also tax-free under Section 10(10D) of the Income Tax Act, 1961.


See the related post : How to save Income Tax
Mutual funds are professionally managed investment schemes in which the funds of investors are collected and invested in stock market, money market, securities etc. Every investor owns a portion of the fund in the ratio they have invested. They are usually run by asset management companies. There are many types of mutual funds available in the market having different risk and rewards like-
  1. Large cap funds
  2. Midcap funds,
  3. Small cap funds
  4. Balanced funds
  5. Debt funds etc.

There are two ways to invest in mutual funds, lump sum investment or SIP (systematic investment plan). 


Similarities between mutual funds and ULIPs.
  • Net Asset Value (NAV) – In ULIPs and MFs, units are allocated on the basis of NAV. NAV is the market value of each unit of the scheme calculated on daily basis, through NAV the investor can access the status of their investment as on date.
  • Capital market – ULIPs and MFs are exposed to capital market and contain an option to invest in debt, equity or a balance of both.
  • Systematic investment – ULIP and MF plans can be invested in one-time lump sum or systematically at regular periodic intervals. A systematic investment can make the advantage of market volatility and yield positive returns.



Difference between ULIP vs. MF


Unit Linked Insurance Plan (ULIP)

Mutual Fund (MF)


It contains Insurance plus Investments

It contains Investment only

Regulated by

It is regulated by IRDA

It is regulated by SEBI

Lock in period

It has lock in period of 5years

It has no lock in period except ELSS i.e. 3 years

Life Risk Cover

Yes, also cover life risk

No, cover life risk


It has lock in period of 5  years so they have low liquidity

It has no lock in period so they have high liquidity except ELSS i.e. 3 years


Higher charges

Lower charges


Low Return

High Return


Low Risk

Higher Risk

Tax Saving

Deduction available under section 80C up to ₹150,000 for investment in ULIPs. The sum assured paid to the nominee would also be tax-free under the section 10(10D).

Deduction available under section 80C up to ₹150,000 for investment in ELSS

Entry Load

High entry load

Small entry load

Investment plan

Long term Investment plan

Short or Medium investment plan

Maturity period

Maturity period falls from  between 5 to 20 years as may be opted by the investor

No maturity period except ELSS

Post Maturity

Under ULIPs the investors does not have the option of staying invested post-maturity.

The Investors have the option of staying invested in the scheme even after maturity.

Premature Redemption

The Investors can premature his plan by paying penalty i.e. ULIPs  plan can be redeemed within 3 years after paying of premium, at a loss. The administrative charges are quite high during the initial policy years.

The investor redeems his units before the lock in period (normally a year in case of non-tax saving mutual funds) exit load has to be borne by the investors. Investors are not allowed to redeem his investments in tax saving mutual funds before 3 years.

Switching option

Flexibility in switching funds

No switching option

Consider the following factors to choose a best investment plan-
Mutual fund and ULIPs are two investment products which are linked to capital market and aim at building of wealth for the investors. The decision to choose a financial product for investment depends upon a lot of factors, take into consideration the following points-
  • Purpose of Investment- First, you have to set your goals and purpose of investment, if you have the goal to accumulate and raise your funds you can invest in Mutual funds, or if you have the goal to take adequate insurance you have to take any term plan to protect your family, if you have already adequate insurance plan you can invest in unit linked insurance plan.
  • Liquidity- is a very important criterion for selecting an investment product. You should be able to liquidate your investments when you need them. Equity mutual funds are highly liquid, a person can redeem his units any time. On the other hand, a person can’t withdraw his money from ULIPs before 5 years as that is the minimum lock-in period.
  • Returns on Investment- Equity Mutual Funds have better performance as compared to unit linked insurance plan.
  • Flexibility- ULIPs have a minimum lock-in period of 5 years, whereas mutual funds are highly liquid except for ELSS. Additionally, if you want to switch funds, in a ULIP you will be limited to the options provided by your policy provider. On the other hand, mutual funds come in a large variety and combinations. At the same time, ULIP allows you to switch between funds (liquid to equity fund) for example by paying a switching fee, while you cannot do that in mutual funds as portfolios are managed by professional fund managers. MFs allow you to stay invested in a scheme even after maturity whereas this facility isn't available in ULIPs.
  • Taxability- ULIPs are always more tax efficient than mutual funds. Capital gains from the ULIP are tax-free, whether it is equity or debt. Whereas, investors have to pay 15% tax on short-term capital gains and 10% tax on long-term capital gains (from April 1, 2018) from equity mutual funds. The short-term gains from the debt funds are taxed at a marginal rate, while long-term capital gains are taxed at 20% after indexation
Which is better for you?
Mutual funds have high scores than ULIPs on the grounds like returns, transparency, liquidity, flexibility and financial goals. However, you don’t select an investment product only based on one criterion. You can also protect you and your family to invest in a simple term insurance separately to cover risks and pick a sound mutual fund investment plan (SIP) for long-term goals.


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