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ULIPs vs Mutual Funds – Which gives better returns?

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Created on
August 4, 2022


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With recent financial innovations and the surge in investing in Indian financial markets, today, investors like you have a plethora of investment options. Smart investors always look for better options that generate wealth by taking nominal risks. Often the struggle is to decide which is the better investment, ULIP Vs Mutual Funds?

Irrespective of the financial assets you choose to park your money in, the ultimate goal is that it should build your finances and investment portfolio, fetching the highest return with minimal risks.

On that note, let us look at the different aspects of mutual funds and ULIPs

What is a ULIP?

Insurance companies issue a unit-linked insurance plan (ULIP) that gives you the benefits of investment and life insurance integrated under a single plan. ULIPs are governed and regulated by Insurance Regulatory and Development Authority (IRDA), and the United Trust of India issued the first ULIP in India.

 A particular portion of the premium paid by you against a ULIP is used to give you insurance coverage, and the remaining proceeds are invested in market-linked instruments like debt and equities. Meaning, that it fetches you a return on your investment. And in the case of any unfortunate event, the life cover amount is given to the nominee.

What is a mutual fund?

A mutual fund is an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.It is managed by professional fund managers who make investment decisions on behalf of the investors.Investors in a mutual fund share the profits, losses, and expenses of the fund in proportion to their investment.

Mutual Funds vs ULIP- How Are They Different?

Whether ULIP is purely an investment product or an insurance scheme is often argued and discussed. Mutual funds and ULIP emerge as healthier options for investment, moving away from traditional investments like fixed, deposit, recurring deposits and other government saving schemes. Here are certain differences between ULIP and mutual funds jotted below for your better understanding.

  1. Investing in mutual funds lets you earn and enjoy a lucrative return over and above the benchmark return. As opposed to investing in bank deposits, post office savings schemes, or fixed deposits, it fetches you returns that can potentially beat benchmarks and inflation. 

Traditional asset classes like FD, RD and government savings schemes are relatively safe as the central government backs these investments, whereas mutual funds navigate the market volatility and have a tendency of being bullish in the long term, letting you enjoy a higher return by taking higher market risks.

Based on your risk appetite ULIP allows you to invest a certain portion among investments and an insurance cover, thereby offering a dual benefit. A certain portion of the premium you pay to transact in ULIP provides insurance coverage., Additionally, the other portion of your premium is invested in instruments which have dedicated fund managers handling the same, but the options available are slightly limited compared to mutual funds.

  1. The premiums you pay for ULIP are tax-deductible under Section 80C and tax-exempt under Section  10(10D). If the premiums you pay are above ₹2,50,000, it stands no longer tax-exempt. However, as new amendments and regulations kick in, these are liable to changes.

The amount you pay for mutual funds or SIPs is not exempted except in the case of ELSS. The ELSS category of mutual funds is tax-deductible under Section 80C, and your taxable income can reduce up to ₹1,50,000 if you invest in ELSS schemes.

  1. ULIPs offer you insurance coverage, tax benefits, and higher returns, making it a unique proposition. Conversely, mutual funds do not come with an in-built insurance cover. Certain mutual fund houses are coming up with additional but limited insurance protection for some mutual funds.

When subscribing to a mutual fund, you are served with many fund options and asset classes like gold, equities, commodities, and international equities to choose from. Some fund houses even let you choose sectoral mutual fund schemes and diversified ones. However, ULIP only offers the classic option of either debt or equity as an asset class.

Which is better investment ULIP or mutual fund?

The choice between which is a better investment ULIP or mutual fund, should depend upon your financial goals, needs, and objectives. Mutual funds grow your wealth much faster than other traditional investments, and ULIP provides you with an additional insurance cover along with growing your investment.

ULIPs offer limited liquidity as it has a lockin period of nearly 5 years, and mutual funds allow you to withdraw money depending on your investment scheme. Some mutual funds also charge a fee known as exit load to withdraw money. In the case of ULIPs, this amount cannot be withdrawn before the lock-in period ends.

Mutual fund managers charge comparatively higher fees for active portfolio management and portfolio rebalancing, whereas ULIPs have lower fund management fees and other fees attached. But there are several mutual funds which have lower management fees and expense ratios like index funds which make them more attractive as more profit can go into your pocket. 

Wrapping it up

Not all financial products are entirely meant for all types of investors. If you are an investor looking for capital appreciation and faster wealth creation, mutual funds do a fantastic job of providing you with the desired mutual fund option that matches your investment objectives. If you are an investor with long-term wealth creation and insurance cover goals, ULIP is better suited in that case. Moreover, not-so-market savvy investors who fear the equity market are often seen investing in ULIPs as they are risk-averse. 

It’s only wise to ensure that you do your homework about these instruments in more detail before choosing which one to invest in. 

Learn more about mutual funds here

Frequently Asked Questions

1) Is ULIP a mutual fund?

Often ULIPs are confused with mutual funds. But ULIPs are generally the type of insurance policies that also provide opportunities for wealth creation. It offers a dual benefit of insuring you and generates a healthy investment return. It is not purely an investment product, although similar parallels are drawn.

2) Is ULIP tax-free?

ULIP are tax-deductible under Section 80C and tax-exempt under Section  10(10D). But if the premiums you pay are above ₹2,50,000, it becomes no longer tax-exempt products. As the government introduces new amendments and laws, it is advised that you should stay updated with the new regulations.

3)What is the difference between ULIP and MF?

ULIPs offer you insurance coverage, tax benefits, and capital returns, making ULIP a unique proposition. However, mutual funds do not come with an in-built insurance cover. You can buy separate insurance coverage by paying a premium.

4) Which is the best SIP or ULIP?

Whether SIP or ULIP is best depends entirely upon your financial goals, needs, and investment objectives. What works for someone else might not work for you. SIP only offers capital appreciation, whereas ULIP offers insurance and return on investments. The fund manager generally invests your SIPs into equity, but ULIPs are invested in debt and equities.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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