People use different financial instruments based on their requirements, age, risk-taking capabilities, and level of awareness to achieve their financial goals. Both ULIP (Unit Linked Insurance Plans) and Mutual Funds are one of many profitable investment instruments that help you efficiently. However, there exist some advantages and disadvantages to both financial instruments.
Let’s understand which investment schemes help individual investors to achieve their financial goals.
What is ULIP (Unit Linked Insurance Plans)?
ULIP (Unit Linked Insurance Plans) is an insurance plan that offers dual benefits of investment and life cover. It allows investors to fulfill their long-term goals by accumulating wealth and offers a life cover to protect your loved ones in case of an unfortunate event. One part of the investment in ULIP is considered an insurance premium and another is invested in debt and equity to reap financial benefits.
Different schemes under ULIP
Below table will help you know the broad classification of ULIPs based on various criteria.
| Based On The Type Of Funds | Based On Wealth Creation | Based On The Plan Structure |
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What is a Mutual Fund?
A mutual fund is a financial instrument that pools money from various investors which are then invested in different securities such as bonds, stocks, money market instruments, etc. You can invest in mutual funds through the SIP (Systematic Investment Plan) method or the lump sum method depending on your financial plans.
Below are the different types of mutual funds based on asset class, investment goal, maturity period, and risk.
| Based on Asset Class | Based on the Investment Goal | Based on the Maturity Period | Based on Risk
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Difference between ULIP and mutual fund
Now that you have understood the basic concept of ULIP and mutual fund, it’s time to understand the difference between the two. Before we go on to the differentiation table, Let’s understand how ULIP and mutual funds differ from one another with an example.
Mr. X and Mr. Y invest ₹40000 every month in Unit Linked Insurance Plans and Mutual funds, respectively. A part of Mr. X’s investment of ₹40000 is considered an ‘insurance premium,’ and the remaining part goes towards another financial instrument. With this premium, he gets insurance coverage of ₹4 lakhs in case of an unfortunate event. This way, Mr. X enjoys the benefit of both wealth creation and insurance coverage. On the other hand, Mr. Y can enjoy the benefits of investing in securities; however, he has to buy an additional insurance policy for life cover.
Hope the above example has helped you understand the concept of ULIP and mutual funds. Now, read the below table to learn the difference between the two.
| Unit Linked Insurance Plans | Mutual Fund | |
| Objective | Wealth creation and insurance coverage | Wealth creation |
| Policy Term | Long-term | Short-term, medium-term, and long-term – can be chosen based on your financial goals |
| Lock-in Period | 5 years | No lock-in period (except for ELSS funds, which have a lock-in period of 3 years) |
| Regulatory Body | Insurance Regulatory and Development Authority (IRDA) | Securities and Exchange Board of India (SEBI) |
| Mortality Charges | Based on age, gender, sum assured, etc. | No mortality charges |
| Taxation | ULIP premiums are tax-deductible up to ₹1.5 lakh per annum according to Section 80C of the Income Tax Act, and the maturity amount is also tax-free under Section 10 (10D) of the Income Tax Act, 1961 | Mutual funds are not tax-deductible unless they fall under Equity Linked Savings Scheme (ELSS) |
| Range of Investment Options | Only standard equity and debt variants | Equities, bonds, gold, commodities, international equities, and specific sectors or themes |
| Other Expenses | Include premium allocation charges, administration charges, fund management fees, and mortality charges | Asset management company applies entry and exit charges |
| Risk Cover | The sudden demise of policyholder offers compensation to their family | Doesn’t cover the risk as it is meant for wealth creation |
| Liquidity | Less liquid as the lock-in period is more | More liquidity compared to ULIP |
When should you consider ULIP or a mutual fund?
| Choose ULIP when you want either or all of the below things | Choose mutual fund when you want either or all of the below things |
| To enjoy triple benefits like wealth creation, insurance coverage, and taxation benefits | To accumulate wealth |
| To avail multiple purposes such as accident coverage, retirement planning, or securing a child’s future | To avail multiple purposes like diversification of portfolios, liquidity, and high returns with risk |
| To employ multiple investment strategies under a single platform for different goals | To achieve your goal with a focused single investment strategy |
| To get assured sum at the untimely demise of policyholder | To offer mutul fund amount to beneficiary |
Conclusion
Investing in any financial instrument depends on the investor’s financial needs and purposes. Therefore, you should pick the one that best suits your needs. However, you must know that both Unit Linked Insurance Plans and Mutual Funds have their pros and cons. If you wish to enjoy multiple benefits under a single platform, tax benefits, and insurance coverage, ULIP is the better choice. In case, you already hold insurance coverage, mutual fund can be considered a good investment option. However, you must consider the following things before making any investment decision – market research, due diligence, duration of investment, and risk assessment.
FAQs
When is the best time to make mutual fund investments?
There is no best time to invest in mutual funds because no one can time the market. So, consider investing in mutual funds via SIP as early as possible to take advantage of rupee cost averaging.
Which is a more flexible investment – ULIP vs mutual fund?
When comparing ULIPs and mutual funds, consider checking their unique features and benefits. However, your investment decision should be based on your investment horizon, risk tolerance, and goals.
Does ULIP give good returns?
ULIP gives you tax-free returns. The death payment is tax-free, and you can also claim a tax deduction for the premiums you have paid.
