Mutual Funds Vs ULIPs – Which is the Best Investment Option?

Mutual Funds Vs ULIPs - Which is the Best Investment OptionMutual Funds Vs ULIPs – Which is the Best Investment Option?

It is rightly said “Mutual funds are subject to market risks”, but let us look at the brighter side as well before making investment decisions. When it comes to investment, mutual funds and Unit Linked Insurance policy (ULIP) are two well-known instruments in which most of the individuals invest. Both these instruments are similar, yet different. Each has its own pros and cons but very few investors exactly know their difference and similarities. What does Mutual Funds and ULIPs have in common? Does Mutual Fund Score high compared to ULIPs? Are there any unique positive features in ULIPs compared to Mutual Fund Schemes? Among Mutual Funds Vs ULIPs, which is the Best Investment Option?

Also Read: Best Multicap Mutual Funds to invest in India

Overview about Mutual Fund and ULIPs as an investment option

Mutual funds and ULIPs are two investment products that are linked to capital market and aim at building of wealth for the investors. You have to be very careful before putting your hard-earned money in a particular scheme keeping in mind the factors like your requirements, liquidity, risk appetite, and financial goals. 

What are Mutual Funds?

You can skip if you are already familiar with Mutual Fund concept.

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 like largecap funds, midcap funds, smallcap funds, balanced funds and debt funds etc. Every fund bears different risk and reward profile. There are two ways to invest in mutual funds, lump sum investment or SIP (systematic investment plan). 

What are Unit Linked Insurance Plans (ULIPs)?

If you are already aware about ULIPs, you can skip this section.

Unit Linked Insurance Plans (ULIPs) are life insurance products which provide risk cover for the policyholder along with investment options to invest in a number of qualified investments such as stocks, bonds, or mutual funds. It is a market-linked product that aggregates the very best of insurance and investment. There are a number of plans and options available in the market to choose from considering your needs and risk aptitude.

Also Read: LIC Jeevan Shiromani Insurance Plan – Should you invest?

What is common between Mutual Funds and ULIPs?

There exist few similarities between mutual funds and ULIPs.

1) Exposed to capital market – both forms of investment are exposed to capital market and its trends. Both contain an option to invest in debt, equity or a balance of both.

2) Systematic investment – in both the investment plans, investments can be made 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.

3) Both involve risks – as both are associated with capital market, there is risk factor involved. The returns depend largely upon the performance of the underlying scheme that you have chosen.

4) Both have Net Asset Value (NAV) – in both the investments, units are allocated on the basis of NAV. NAV is the market value of each unit of the scheme calculated on daily basis. It is basically a parameter to calculate and understand the profits of your investment.   

How Mutual Funds score high on ULIPs?

If we talk about pure investment, mutual fund leads to ULIPs in several ways.

1) Mutual fund is a pure investment product. The main aim of mutual fund is to multiply your funds and create wealth. There are a whole lot of options available in mutual funds like debt, equity or any combination of these depending upon your risk appetite. ULIP are primarily insurance products that come with an intention to provide a cover to you and your family as well as tax benefits. Mutual funds also have tax-benefits if invested only in Equity Linked Savings Scheme (ELSS).

2) The degree of risk involved in mutual funds is quite higher as compared to ULIPs as expected returns are also higher in it. The fund managers of ULIP are careful and employ less aggressive investment strategies.

3) Mutual funds generally do not have a lock-in period (except in the case of close-ended fund or ELSS funds which is of 3 years) and hence are more liquid than ULIPs. ULIP have a typical lock-in period of 3-5 years before which the money cannot be withdrawn.

4) The expenses incurred in the mutual funds are much lower than those in ULIPs. There are three types of expenses generally charged by mutual funds i.e. entry load, exit load and recurring fund management charges. Entry load and exit load are one-time expenses which vary between 1-3% and recurring charges are towards administration and management of funds and comes around 2.5%. In ULIPs, the upfront charges are much higher and most of them are collected in the initial period of 3 to 5 years.

Also Read: HDFC Click 2 Retire Online ULIP – Should you invest?

Mutual Funds Vs ULIPs – Which is the Best Investment Option?

Mutual funds and ULIPs have much different criteria and concepts. The biggest difference is that ULIPs provide life cover and financial support to your family which mutual funds do not. This is the money the insurance company promises to pay in case of death of insured.

The decision to choose a financial product for investment depends upon a lot of factors. Firstly, take into consideration what is your purpose of investment – whether it is wealth creation or you want a life cover along with it. A lot depends upon risk appetite of the investor also. Mutual funds carry a higher risk factor in comparison to ULIPs. Time horizon also plays an important role in deciding the investment. If you are a short-term investor of say 3-5 years, then mutual fund is a good option. The commissions are really high in initial years of ULIP. Exiting from ULIP after initial years may badly hamper your returns as a large chunk of investments would be gone in meeting these expenses. If you wish to have an insurance cover along with wealth creation, you can opt for a term plan. Term plans offer a higher sum assured at much lower costs. Beyond term plan, you can invest your money in mutual funds.

If you are low risk appetite investor and do not want to take high risk by investing in stock market or mutual funds, low cost ULIP’s could be an alternative investment option.

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Mutual Funds Vs ULIPs – Which is the Best Investment Option

Suresh KP


  1. Hello guys,

    It is very helpful blog for me & I get all the information about mutual funds & ulips plans. Thanks for sharing with us. I really like it and I took ulip plan from one of the best life insurance company. You can also try it once.

  2. Hi Suresh,

    Could you please help me with below query ?

    I have a HDFC ULIP plan which will complete lock-in period this year. If i liquidate it, do i have to add the amount as taxable income in this FY ?. My plan is to liquidate it and purchase a pure eterm plan and put rest in ELSS and stocks.



    1. Hi Venu, If you are planning to close ULIP plan after lock-in period, you need to check in case of any gains on such policy. Otherwise, it would be just that you have been paying premiums which insurance company has eaten it. Coming to tax point, if your ULIP lockin period if 5 years, no tax is payable on redemption amount. If it is less than 5 years, the premium which you claimed as deduction u/s 80C would get taxed

  3. LTCG hampered Mutual funds returns since ULIP comes with insurance no LTCG apply on returns on ULIP MATURITY funds..

    Moreover ULIPS never project more than 8%returns but always give more than 10%returns but Mutual funds purely rely on market.. Before your maturity date market crash you might loose 20% straight..

    Where as ULIPS have facility you can transfer your funds to debts after you earned enough profit.. Where market crash will not impact so much.

    Every switching of funds MF your fund will deducted with Hugh exit load fee and LTCG will apply on your maturity value.

    Where as in ULIPS you can change your 60/40%equity /debts ratio any time no exit load bcaz you swap your fund internally and no LTCG will apply.

    One should invest 80% of his funds in ULIPS the 30% Mutual Funds..

    1. Thanks for the inputs Sunil. However, if you observe, even after LTCG of 10% in long term, Mutual Funds still score high. One should take calculated call when checking between ULIPs and Mutual Funds

  4. Are the returns from ULIPs taxable similar to MFs? Can you please explain the differences in terms of tax benefits. Thanks.

    1. Hi Suresh, Here is the taxation of ULIPs

      1) If the premium paid on the policy is less than 10% of the sum assured during the term of the policy the amount received on maturity are exempt from tax. (For policies purchased before 1st April 2012, the premium must be less than 20% of the sum assured). This exemption is allowed under section 10(10D) of the Income Tax Act. You must report this as exempt income in your income tax return.

      2 )If the premium amounts are more than the % prescribed above, the entire money received at maturity has to be added under Income from other sources in the income tax return. This shall be taxable at the slab rate applicable to you.

  5. Sir I am a regular follower of your articles and they are very informative I appreciate for your Noble cause along with investment ideas I request you to share articles about selecting of health insurance plans because now a days due to life style so many people are suffering from various diseases with out adequate health insurance plans and if we go through the agent or insurance web aggregator there is also lot of confusion in the same plan and if we contact the insurance companies directly they are also mis selling the products and people are facing lot of problems how to select a good health insurance plans which will benefit the people in saving their hard earned money which they are spending for their treatment

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