What is the Difference Between ULIP and Mutual Funds?
There are plenty of investment options available in the market that can help you accelerate financial growth. Among the choices, ULIP and mutual funds have gained popularity in recent years. However, you need to select an option that ensures overall security.
Keep reading to find the differences in ULIP vs mutual funds and the linked variables!
What Are ULIPs?
ULIPs or Unit Linked Insurance Plans combine the benefits of insurance and investment. These plans offer an investor the scope to earn considerable returns while maintaining enhanced security.
A proportion of the premium paid against ULIP is used as one’s life cover. The remaining fund is pooled and invested in debt or equity instruments.
However, before investing in ULIP, you should also have a fundamental idea of other investment vehicles like mutual funds. Checking the difference between ULIP and mutual funds would be helpful in this regard.
Additionally, novice investors often confuse ULIPs with SIPs. Therefore, one must know the difference between ULIP and SIP before deciding on an investment path.
SIPs, or Systematic Investment Plans, are primarily associated with mutual funds. These are investment options that allow individuals to invest in mutual funds at regular intervals instead of a one-time, lump-sum investment.
What Is a Mutual Fund?
Mutual funds are investment instruments that help investors to pool their money into a corpus, which invests in various securities, such as stocks and bonds. An AMC or Asset Management Company manages this fund.
The performance of a mutual fund scheme depends on the performance of underlying securities. Hence, if the value of the security rises, the overall portfolio’s value also rises, which results in capital gain.
Differences Between Mutual Funds and ULIP Plans
Here are some basic differences in ULIP plans vs mutual funds for an in-depth understanding.
| Factors | ULIP | Mutual Funds |
| Purpose | ULIPs are a combination of insurance and investment. They help generate wealth and offer security. | It is a pure investment product that invests in varied securities. There is potential to generate considerable returns in the long term. |
| Regulatory Body | Insurance Regulatory Development Authority of India | Securities and Exchange Board of India |
| Tax Benefits | An investment made under ULIP qualifies for deductions under Section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to ₹1.5 lakh. Additionally, the death benefit under ULIP is completely tax-free. | Only ELSS (or Equity-Linked Savings Schemes) can get a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. |
| Policy Term | Long term | Can be long, short and medium-term. |
| Return on Investment | The ULIP returns can be dynamic as it deals with debt, equity, etc | Returns on mutual funds can vary depending on the scheme. |
| Lock-in Period | They have a lock-in period of 5 years | Most mutual funds do not have a lock-in period. |
| Expenses | Premium allocation charges, administration charges, fund management charges, and mortality charges are incurred against ULIP | Professional management fees and operation fees are levied on mutual funds. Some mutual funds also incur exit load charges. |
| Risk Cover | Nominees are compensated the incurred sum when a policyholder passes away. | Investment is transferred to a nominee. |
Which Is Better: Mutual Fund or ULIP?
The decision of investing in either of these vehicles depends on an investor’s needs and preferences. Moreover, one should take several aspects into account before investing, such as his/her financial goals, investment horizon, risk appetite, past performance of a scheme, etc.
For instance, if you are looking for security and wealth creation, ULIPs can be a suitable choice. If you prefer liquid investments, then mutual funds can be a suitable option.
Additionally, using a ULIP vs mutual fund calculator would be a smart decision in this regard. Furthermore, it is advisable to take an expert’s opinion on the financial implications of ULIP vs mutual funds for you.
Frequently Asked Questions
What is the method to calculate ULIP?
You can calculate ULIP with CAGR, which evaluates the annual growth.
Can I withdraw my ULIP fund after the lock-in period?
Yes, you can withdraw the ULIP fund after the end of the lock-in period.