ULIP or Mutual Fund: Choose the One That You Need

ULIP or Mutual Fund - Choose the One That You NeedULIP or Mutual Fund: Choose the One That You Need

Choosing the right investment plan helps you build your wealth and accomplish your financial goals on time. However, with multiple investment instruments available in the market, selecting the one that is right for your purpose can be overwhelming. Most often, people are confused about whether they should invest in Mutual Funds or Unit Linked Insurance Plans (ULIPs). To decide which plan is best suitable from a financial perspective, you must first understand the plans and the difference between the two. Also, it is advised to have your financial goals clear from the start. In this article, we will be discussing the difference between unit linked insurance plans and mutual funds, and the advantages that both investment vehicles offer. This will further help you make an informed decision of where to put your money. Keep in mind that both these products serve different purposes.

Also Read: Best SIP Mutual Funds for 2020

ULIP or Mutual Fund: Choose the One That You Need

1) The Basic Difference

Unit Linked Insurance Plan or ULIP is a hybrid product that offers the dual benefits of insurance as well as investment. Here, a part of the premium paid is utilized towards life insurance coverage and the remaining is invested in funds of your choice. ULIP investments are ideal for young investors who want to build their wealth over time and are looking for a long-term investment.

Mutual funds, on the other hand, have been in the market for a long time. They are solely an investment instrument that serves the purpose of wealth creation. It exposes your investment portfolio to market-linked equities with an objective to earn capital growth over a period of time. Investors put their money in mutual funds with the expectation that the returns earned will beat inflation.

Now the dilemma that most investors face is this – ULIP vs Mutual Funds, where should one invest one’s money? Is it necessary to choose one tool? Or should you have both in your portfolio?

2) The Tax-Efficient Way of Investing

People usually make an investment to save taxes and tend to look for tax-efficient products. This way, they get to keep their hard-earned money as much as it is possible and legitimate. Tax-efficiency is a prominent feature that puts ULIPs ahead in comparison to mutual funds.

With ULIPs, you are eligible for tax deductions of up to INR 1.5 lakhs on the premiums paid under Section 80C of the Income Tax Act, 1961. In other words, the amount that you invest in ULIPs is exempted from tax. Also, unlike mutual funds, the returns that you earn through ULIPs are not levied with the LTCG tax (long term capital gains tax).

On the downside, ULIPs inherently come with certain fees like fund management charges, admin charges, mortality charges and so on. In comparison, mutual funds are a more transparent investment option with no hidden fees.  

3) Looking Ahead – Short Term or Long term

To allow your investments to earn better returns, it is essential that you keep the money invested in long-term plans. It basically improves your chance to achieve your financial goals in the set time-frame.

Based on this, whether you are investing in ULIPs or in mutual funds, it is essential that you remain invested for the long term. Mutual fund returns will help your savings to beat inflation and ULIP returns will help you to overcome the several fees and charges that you pay for this product in the initial years of investment.

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So, in the long run, to take care of the financial needs of yourself and your loved ones, investing in ULIPs is a good choice. It allows you to enjoy the prospect of capital appreciation as your investment portfolio is exposed to equities and government securities and provides the benefits of life coverage so that your loved ones are financially secure in your absence.

On the other hand, choosing a mutual fund based on your risk appetite will also help you to achieve your financial goals. However, ensure you do thorough analysis of the fund’s past performance before investing your money. You will have to tide through at least a few upward moving market cycles before your portfolio starts earning decent returns. And through the SIP method of investing in mutual funds, investors have the potential to earn returns that are averaged out over market fluctuations. 

Conclusion: Understanding both the products before you make a decision is essential. With this article, we believe we have helped you to understand that both these tools can be an integral part of your investment portfolio. In the end, it is your decision where you plan to invest your money. So, choose wisely!

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Suresh KP

ULIP or Mutual Fund: Choose the One That You Need


    1. Both have different objectives. Insurance plans provide life insurance coverage. Insurance cum investment plans provide life protection + savings. However returns from such funds would be always low. The returns can range between 4.5% to 6.5%.

      Mutual Funds on other hand can provide 10% to 15% annualised returns depending on the MF category chosen by investors.

  1. sir,

    Could you please inform which are the best ULIP plans for investment. My age is 44 I am looking for 10-15 years.


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