Difference between ULIP vs mutual funds. All you need to know

In the previous article, we discussed the difference between debt funds vs hybrid funds. In this article, we will look at the difference between ULIP vs mutual funds.

ULIP (Unit-linked Insurance Plan) is an instrument offering a combination of investment and insurance. It includes an asset and a life insurance cover under one plan.  

ULIPs bring forth the opportunity to create wealth and the security of a life cover. The working ULIP is as follows: a part of the premium goes towards life coverage, and the rest of the money is invested into different market products like stocks and bonds. 

A mutual fund is a financial trust that collects funds from investors and invests them into different instruments like stocks, bonds and other money market instruments.  

Fund managers manage mutual funds and make investment decisions on behalf of the people who have trusted them with their money.  

There are different types of mutual funds, such as equity mutual funds, debt mutual funds, and hybrid mutual funds. depending upon the investment proportion in debt and equity.  

These different types of mutual funds vary in their risk and return potential. Mutual funds are one of the most popular investment options today.

ULIP vs mutual funds
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Differences between ULIP vs. mutual funds

Scope of investment

The main difference is that a mutual fund is merely an investment option, but ULIP provides insurance benefits. It works as a single premium for both investment and life coverage purposes.

Return on investment

The ULIPs offer lower returns than mutual funds – this is because the ULIP promises a fixed sum of money (involving life insurance benefits). On the other hand, mutual funds provide relatively higher returns because they are also dependent on the risk factor of the market.  

Tax benefits

Mutual funds offer tax deduction only under investments in the Equity-linked savings scheme; investments in any other mutual fund scheme do not offer any tax deduction.

The redemptions are also subject to taxation under different brackets for equity debt funds. Investments in ULIPs can get a deduction under section 80C of the income tax act 1961. The available deductions are to the tune of Rs 1.5 lakhs.  

Lock-in period

Since ULIPs are insurance-based products, their lock-in period is predefined, and the invested money cannot be withdrawn before the end of the period. The timestamp for ULIPs generally ranges from 3 to 5 years.

On the other hand, mutual funds generally have a lock-in period of one year, but in some cases, like ELSS products, the lock-in period is three years.  


Mutual funds can charge an expense ratio to the upper cap of 1.05%, as set by India’s Securities and Exchange Board. However, with ULIPs, there are no caps. ULIPs fees can vary to higher levels than mutual funds.  

Risk coverage

Being an insurance-based product, ULIP offers risk coverage by assuring a sum of money to the family in the event of the plan holder’s death. However, mutual funds do not provide any such facility.

Ideally, you should purchase mutual funds if you have a short- to medium-term time horizon with considerable liquidity and an average risk-taking capacity.  


Transparency is an essential factor to consider before evaluating which instrument to buy. ULIPs are complex investment products. Thus, they have a lesser transparent structure regarding the expenses and the asset allocation.

Mutual funds are better because you can get a detailed report of the investments made on your behalf.  

Finally, your ultimate decision to invest in mutual funds or ULIPs rests with you. Before deciding, you must analyze your financial goals, risk profile, investment tenure etc.

Consult an expert advisor to get the right plan for you

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