ULIPs vs Mutual Funds

Table of Content

1. What Is a Mutual Fund?

2. What is a Unit-Linked Insurance Plan (ULIP)?

3. Differences between ULIP and Mutual Fund

4. Factors to Consider Before You Decide Between ULIPs and Mutual Funds

5 ULIPs vs Mutual Funds: Which One to Choose?

6. Summing Up

7. FAQs on ULIPs vs Mutual Funds

ULIPs and Mutual Funds, which is a better option, is open to debate. Both are considered good investment options in 2025. The investor’s objectives, timeline, and risk appetite influence the decision. For a seamless choice, consider the following:

• ULIPs require a long-term commitment as there is a lock-in period. Mutual funds are suitable for medium, short, and long-term goals, as there is no lock-in period except in some assets, such as ELSS and closed funds. 

• Give a thought to your objectives. If investment and life cover in a single plan is your preference, then ULIP is better. Mutual funds are suitable for people who prefer only investment to maximise returns.

• Analyse your risk appetite, objectives, and timeline before investing.

• If you prefer high liquidity, Mutual funds are a better option as there is no lock-in period.

• Fund choices and investment strategies are wide in Mutual Funds unlike in ULIPs where the choice is restricted to specific schemes.

In this policy, the investment risks in the investment portfolio is borne by the policyholder 

What Is a Mutual Fund?

A Mutual Fund is an investment tool wherein contributions from various investors are combined and invested in market-linked assets, such as bonds, equities, debt funds, money market instruments, etc. 

Asset Management Companies take the responsibility of managing the mutual fund’s activity. The returns generated get distributed among the investors. However, a small percentage of the returns on investment is collected annually as an expense ratio.

A mutual fund is convenient for both small and large investors. Small investors can contribute small amounts regularly via systematic investment plans, while others can make a single lump sum investment.

What is a Unit-Linked Insurance Plan (ULIP)?

Unit-Linked Insurance Plan (ULIP) is a life insurance plan that contains life cover and investment components. It helps you create wealth over time while securing your family’s financial future. The beneficiaries receive a lump sum death benefit in the event of the policyholder’s untimely death. The death benefit helps them take care of their financial requirements. 

Investors can decide the percentage of the premium that goes towards life cover and the investment in market-linked assets. The policyholders can also choose to invest in equity, debt funds, bonds, etc., depending on their risk appetite, monetary objectives, and time horizon. They are also allowed to switch between funds according to changing market trends and their goals during the policy term. 

By investing in ULIPs, policyholders qualify for tax benefits under Section 80C as well as Section 10 (10D) of the Income Tax Act, 1961 Subject to the conditions as prescribed . The premiums you pay for ULIPs are eligible for deductions under Section 80C. In addition, the death benefit received is completely tax-free and benefits received on maturity may also be exempt under Section 10 (10D) Subject to the conditions as prescribed.

Differences between ULIP and Mutual Fund

The investors are always in a fix when they have to select between ULIPs and Mutual Funds. The key differences between ULIPs and Mutual Funds mentioned in the table help them make an informed decision. 

Factors to Consider Before You Decide Between ULIPs and Mutual Funds

Whenever the confusion is about ULIP Vs Mutual Fund, consider the factors given below before making an investment choice. 

• Tax Benefits

When it comes to ULIP vs Mutual Funds, delving into tax benefits is crucial before making the choice. 

Under ULIP, the premiums paid qualify for tax deduction under Section 80C. The death benefit is completely tax-exempt and maturity benefits may also be exempt under Section 10(10D) of the Income Tax Act, 19611 subject to conditions as prescribed. However, for premiums exceeding Rs. 2.5 lakhs in a financial year, long-term capital gains beyond Rs. 1.25 lakh are taxed at 12.5%.. 

You are not eligible for a tax deduction for investments in Mutual Funds except in ELSS. You qualify for tax deduction under Section 80C of the Income Tax Act, 1961 for investments in ELSS maximum upto 1.5 Lakh. 

• Portfolio Flexibility

Portfolio flexibility is the key factor that influences your ULIPs vs Mutual Fund decision. ULIPs allows the investor to decide the portions that go towards life insurance and investment. They can also allocate the percentage for equity and debt funds as well. 

In mutual funds, the investors have to choose a scheme that aligns with their financial objective and risk appetite and are offered only entry and exit options.

• Risk Factor

It is imperative to consider the risk factor while making a choice i.e., mutual fund vs ULIP as it impacts the return on investment. The risk associated in mutual funds investments is much higher than ULIPs. Investors who understand the market trends well and are adept at making adjustments to balance the risk can invest in mutual funds. Whereas, ULIPs are a better option for conservative investors who prefer capital protection over returns.

ULIPs vs Mutual Funds: Which One to Choose?

Choosing between ULIPs vs. mutual funds is tricky. Deliberate on the following points when you have to choose between ULIPs and Mutual Funds. ULIPs are an ideal option for:

• Those seeking life insurance and investment components in a single plan. They can decide on the percentage of the premium that goes towards life coverage and investment.

• Conservative investors with a low-risk appetite. 

• Investors focusing on reducing the overall tax liability. ULIPs provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961 Subject to the conditions as perscribed1. 

• Persons looking for easy switching options to readjust the portfolio according to changing market trends, goals, and risk appetite without exit load and taxes. 

Mutual Funds are suitable for: 

• Individuals looking for pure investment exposure. 

• Investors focusing on liquidity and cost efficiency. ULIPs have a lock-in period of 5 years. With no lock-in period on open ended funds, the funds are easily accessible during emergencies in mutual funds. Mutual funds are transparent about the expense ratio whereas ULIPs have hidden charges such as policy administration fees, switching fees, mortality charges to cover the risk of providing death benefits.

Summing Up

To sum up, both ULIPs and mutual funds are good investment options if they align with your financial objectives and risk tolerance. For example, if you are looking forward to making investments which are highly liquid and offer higher returns, a mutual fund can be a good choice. But if you have a long-term objective, low-risk tolerance and the need for life insurance coverage for your loved ones along with tax benefits, ULIP could be the better choice. 

FAQs on ULIPs vs Mutual Funds

Q. Which is better ULIP or mutual fund?

Whether ULIPs are better or mutual funds depends on what the investor is looking for. Investors looking for both investment and life cover options, seeking tax benefits, and preferring capital protection over returns can opt for ULIPs. On the other hand, investors prioritising cost efficiency and high liquidity can go for mutual funds.

Q.Is it good to invest in ULIP?

Yes. It is good to invest in ULIPs if you are looking for both life cover and investment components in a single plan. ULIPs help grow your money over time with the investment component and provide financial security for your family in your absence with the life coverage component.

Q.What are the tax benefits of ULIP?

The premiums paid towards ULIPs in a financial year are eligible for tax deduction under Section 80C of the Income Tax Act 19611, and the death benefit and maturity benefit is tax-exempt under Section 10(10D) subject to conditions as prescribed.

Q. When is the best time to make mutual fund investments?

There is no specific best time to make mutual fund investments. However, investing in a bearish market with potential for future growth is ideal, according to professionals in the investment field

Q. Which is a more flexible investment – ULIP or mutual fund?

Mutual funds are a more flexible investment option as they provide a wider range of investment options and more liquid as they do not have a lock-in period. ULIPs provide both life cover and investment components, but have lower flexibility in fund selection. They also have a lock-in period that restricts access to funds in times of need.