ULIP vs Mutual funds

In these modern times, when new and exciting investment avenues have opened up, anyone and everyone is looking to invest their hard-earned money in one way or another. Investors are always on the lookout for ways of investment that will give them the best returns and help them accumulate wealth over a period of time. Investing itself is relatively easy, but choosing where to invest in the confusing part, especially for new investors. In this article, we’ll help you understand and differentiate between two very similar-looking investment options: the ever-popular mutual funds, and the Unit Linked Insurance Policy or ULIP.

Both mutual funds and ULIPs are investment avenues with some very key differences. But before we delve into the differences, let us first understand exactly what mutual funds and Unit Linked Insurance Policies are.

What is a mutual fund?

A mutual fund is an investment vehicle that first pools funds from multiple investors. Once a sizable corpus is collected, it is invested in various financial instruments like equity, debt, and other fixed-income securities. They’re managed by specialized fund managers who invest the money in the investors’ behalf. Mutual funds are an excellent option for investors who do not want to invest wholly into the stock market directly but want a more balanced portfolio that invests in both high and low risk funds.

What is Unit Linked Insurance Plan?

Despite comparisons with mutual funds and because of the very term ‘insurance’ in its name itself, it is quite clear that a ULIP is first and foremost, a life insurance scheme. It is a life insurance plan that provides life cover for its policy holder and in the event of his or her death, the nominee is paid the death benefit as a lump sum amount.

Why is it confused with mutual funds if it's an insurance plan? That’s where the ‘Unit linked’ comes into the picture. You see, a ULIP is not purely an insurance plan. It is a combined plan where a part of the premium goes into the life insurance component of the ULIP while the remaining part is invested very much like a mutual fund in various financial securities.

ULIP vs MF: Some key differences

  • Life insurance

    The biggest difference between a ULIP and a mutual fund is that a ULIP provides a life insurance cover and a mutual fund does not. A mutual fund is a pure investment instrument and if you’re investing in them but also want a life cover then you must purchase a life insurance policy separately.

  • Lock-in period

    Since a ULIP offers life cover, there is usually a lock-in period of 3 to 5 years before which you cannot redeem your investment. Mutual funds, on the other hand, do not have any lock-in period unless you have invested in an ELSS (Equity Linked Savings Scheme), which will have a minimum lock-in period of 3 years.

  • Liquidity

    Liquidity is the ability of your investment to be converted into usable, liquid cash. Mutual funds are highly liquid as you can redeem them very quickly if you need the money and your account will be credited. ULIP’s, on the other hand, are not very liquid because of the lock-in period that comes with it. Surrendering your ULIP will incur heavy discontinuance charges that will most likely eat into any returns that you might have expected.

  • Taxation

    As far as saving on taxes is concerned, ULIPs are much more beneficial because the premiums you pay are tax-deductible up to Rs. 1.5 lakh per annum according to Section 80C of the Income Tax Act. On the other hand, mutual funds are not tax-deductible unless they fall under the ELSS or Equity Linked Savings Scheme.

  • Expenses

    There are some expenses that you must incur both in ULIPs as well as mutual funds. But the thing to note is that these expenses can be more in the case of ULIPs like premium allocation charge, administration charge, fund management fees, mortality charges etc. In comparison, mutual funds only charge fund management fees and exit charge.

  • Transparency

    When it comes to transparency of asset allocation and expenses, mutual funds are more forthright in making this information available to the investor. ULIPs, however, are complex policies with both insurance and investment components and tend to be less transparent about hidden charges and asset allocation.


Contrary to popular belief, there is a lot of difference between ULIP and mutual fund, and one can choose between these options for investing their money. It boils down what your requirements are. If you want a long term investment option, are not worried about lock-in periods and do not have an additional life insurance policy, then ULIP might be a viable option for you. But if you already have a life insurance plan in place, and are looking purely to invest for short term or long term gains, then mutual funds might be better for you.

Open ZERO Brokerage Demat Account