Mutual Funds
by 5paisa Research Team Last Updated: 2023-02-02T15:57:00+05:30
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Selecting the right investment option from a pool of different funds, stocks, bonds, and other tools is always a challenge for an investor, especially a beginner. When it comes to the right investment options, mutual funds and ULIP are two options that tend to confuse a lot of people. 

Both have their own benefits and importance, so the selection needs to be based on one's financial goals and requirements. In this article, we will compare Mutual funds Vs ULIP to help you select the most suitable option for you. Let's begin! 


What is a Mutual Fund?

Mutual Fund is perhaps the best investment option that is available for everyone. It offers low-risk investment opportunities to generate good returns and build an impressive future corpus. 

Mutual funds are the best choice when:

●  Your main objective is to earn returns from your savings. 

●  You have a term insurance plan 

●  You have a better understanding of different risk factors associated with different assets. 

●  The best part about mutual fund schemes is that they offer both long and short term investment plans. Further, there are two ways to invest in mutual funds, you can either start a SIP (Systematic Investment Plan) or pay a single lump sum amount. 

Investors frequently use mutual funds because they typically provide the following benefits:

1. Effective Management: The research is done for you by the fund managers. They choose the securities and keep an eye on the results.

2. Diversification: Mutual funds frequently make investments across a variety of businesses and sectors. This reduces the danger of you losing money if one firm fails.

3. Affordability: For first-time investments and future purchases, the majority of mutual funds have relatively modest price thresholds.

4. Liquidity: Investors in mutual funds can conveniently redeem the shares at any time for the existing net asset value (NAV) including any redemption costs.


What are ULIPS?

ULIP stands for Unit-Linked Insurance Plans. These plans provide investors with a term insurance cover along with ways to invest their money to gain returns. 

ULIPs are different from other insurance policies because they offer higher returns in investing in a range of asset classes. 

Although it sounds like a better scheme, it has its own drawbacks. To understand this, one should have an understanding of the difference between insurance goals and investment goals. Note that the main objective of insurance should be achieved with an insurance policy and not from an investment plan. 

Which is better - ULIPs or Mutual Funds?

● The ULIP is for you if you're seeking for both an investing choice and an insurance coverage. But keep in mind that ULIPs are less adaptable than mutual funds. MF plans are more flexible while not providing insurance protection.

● Additionally, ULIPs have a rigorous five-year lock-in duration. However, with the exception of ELSS plans, mutual funds let you redeem your investment whenever you choose.

● Charges for premium allocation, mortality, administration, and fund management are all included in ULIPs. However, there isn't an entrance load when buying mutual funds. They have a certain exit burden and solely charge fund management costs.

● With ULIPs, you are permitted to move funds for free a set number of times each year. You will be charged for switching once that amount has been reached. But with mutual funds, this is not the case. Here, you are free to swap whenever you wish.

● ULIPs have comprehensive insurance coverage. If a policyholder passes away during the duration of the policy, they provide the family with a guaranteed sum. But there isn't an insurance plan like that for mutual funds.


Difference Between Mutual Fund and ULIP

ULIP is one of the most popular investment options for a retirement fund. Mutual funds on the other hand are available for everyone, but they are very different from ULIPs. Let us understand the major differences between Mutual Funds and ULIP with the help of the following table.


Mutual Funds


Return on Investment (RoI)

Overall, mutual funds offer better returns than ULIPs.

ULIPs carry a risk that is even lower than the risk associated with equity mutual funds. However, the lower the risk, the lower will be the returns

Lock-in Period

Mutual funds come with a shorter lock-in period, which is mostly one year. However, there are some mutual funds like ELSS (Equity Linked Savings Schemes) that have a lock-in period of a minimum of 3 years.

Because ULIP is essentially an insurance policy, it comes with a specific lock-in period which is defined by the insurance company. This lock-in duration can range from 3 to 5 years depending upon your plan. You can not redeem your amount before the completion of this period. 




As compared to ULIPs, mutual funds don't incur any mortality charges, Mutual funds usually entail charges like expense ratio and exit loads.

The fund management charges of ULIPs are capped at 1.35% as per the IRDA regulations. This is what most insurers charge for various equity funds. However, bond funds are slightly lower with around 0.9%.

Investment IOptions

You will find a plethora of Mutual fund schemes across different asset classes. Here, mutual funds outperform ULIPs in terms of the availability of investment options. Here, you can invest in a range of asset classes including bonds, equities, international equities, commodities, gold, and many more. 

On the other hand, ULIPs don't have a lot of options. They only have debt and equity variants. Thus, you get limited investment options with ULIPs. 



Mutual funds offer great transparency to their investors. They are clear about their fees and the asset classes where they invest your money. 

On the contrary, ULIPs are very complex in nature. They combine portfolio allocation and risk management but their structure lacks transparency. 


Taxation Benefits

In the case of mutual funds, you are offered only one-time tax exemptions when investing in ELSS schemes. All other mutual funds are inclusive of taxes. 

As per Section 80C of the 1961 Income Tax Act, any ULIP investment of up to 1.5 lakh per year is eligible for a tax deduction.



Factors to Consider Before Deciding Between ULIP and Mutual Fund

● Risk Involved: As an investor you must take care of the risk involved in the investment made.Compared to ULIPs, mutual fund schemes have higher risks. If something goes wrong, an investor's profits will be small relative to what they initially put up. The beneficiaries of ULIPs might still count on the term insurance payouts, notwithstanding the poor returns.

● Portfolio Flexibility: You may choose how much of a ULIP must be invested and how much should go toward life insurance. In a similar vein, you can alternate between equities and debt funds based on the state of the market. When making investment in mutual funds, the investor is aware of whether they are buying equity- or debt-oriented funds.

● Tax Advantages: You must also consider the tax bracket while making your investment choices. According to Sections 80C and 10(10D) of the Income Tax Act of 1961, the premiums paid for ULIPs and the returns on ULIPs are both tax-free. However, keep in mind that ULIPs issued after February 1, 2021, would be classified as capital gains if the yearly premium paid is greater than Rs. 2.5 Lakh, and such plans will be subject to 10% taxation at maturity. Tax deductions are not available across all mutual funds when it comes to mutual funds. Tax reductions for mutual funds are applicable to investments made only in ELSS.

You must also factor-in variables like transparency, your risk-appetite and most importantly your financial goals while contemplating an investment option be it mutual funds or ULIPs.
Also understand that insurance and investment are two different things and hence they should not be combined. If you're looking for insurance plans, then buy a good policy with no investment objectives. And if you want to invest your extra income, then go for an investment plan like a good mutual fund scheme. We hope this Mutual Fund Vs ULIP comparison helps you in making the right decision. To become a smart investor, head directly to 5Paisa NOW! 


Insurance and investment are two different things and hence they should not be combined. If you're looking for insurance plans, then buy a good policy with no investment objectives. And if you want to invest your extra income, then go for an investment plan like a good mutual fund scheme. We hope this Mutual Fund Vs ULIP comparison helps you in making the right decision. To become a smart investor, head directly to 5Paisa NOW! 


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More About Mutual Funds

Frequently Asked Questions

A unit-linked insurance plan is an excellent investment at any time, just like mutual fund investments. You can invest in ULIPs when the markets are up or down because they help smooth out market volatility.

ULIP in comparison to traditional investment options like FD, post-office savings etc, shall give you higher returns as it invests in asset classes. But in comparison to mutual funds it shall give you lower returns.