Difference Between Unit-Linked Insurance Policy (ULIP) and Mutual Funds

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ULIP and Mutual Funds are two terms that we start hearing the moment we consider investing our hard-earned money. However, before you make any investment, you need to understand the meaning of these two first. Well, let us start with an example.

Akshay and Amit have been friends since their college days and both of them bagged their job in the same company. Now that they are financially independent, they are giving thoughts on some investment options. Akshay chose ULIP and invested INR 50,000; while Amit put his money in mutual funds.

Now, from the next month, a certain amount from Akshay’s salary is deducted as term cover. This cover provides him life insurance that is worth INR 5 lakhs. The difference is that in case of death of either of them, the family of Akshay will receive the term cover of INR 5 lakh, or at least the value of the invested fund, whichever is higher. However, Amit’s family will not receive the same.

Hopefully, this example will give us an idea of the basic difference between ULIP and mutual funds.

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What are Unit-Linked Insurance Policy (ULIP)?

The full form of ULIP is Unit-Linked Insurance Policy. It is a life insurance policy that offers a combination of risk cover as well as investment. This can be called a unique offering that will enable you to avail the benefits of both assets and life insurance cover under one plan.

Also Read: 11 ULIP Charges You Should Be Aware Of

What are Mutual Funds?

Mutual Fund is a pure investment product, which is a single financial trust. In this, money is pooled together from various investors in several market-linked funds so that a return is earned. Mutual Fund can invest in either or both equity and debt. In the financial market, it has been a popular investment option for long-term wealth creation. It is one of the most common options for investments today. There are several types of Mutual Funds that you can find in India, which include Debt Mutual Fund, Equity Mutual Fund, and many other types of funds.

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Unit-Linked Insurance Policy (ULIP) vs. Mutual Funds – Detailed Comparison Chart

The expenses that are covered include insurance premium allocation charges, mortality charges for life, fund management charge, and admin charges.

Parameters ULIPs Mutual Funds
Purpose Insurance cover along with investment benefits. Investment benefits.
Objective Long-term plans that come with insurance and investment benefit. Perfect for investment for the short to medium term.
Regulatory body IRDA SEBI
Return on investment The return is variable since it is linked to Equity. The return is low. The return is flexible since it is linked to Equity. The return is higher as compared to the hybrid ones.
When should you consider Consider ULIP if you want protection as well as better than nominal returns in long-term plans. Consider Mutual Fund if you are looking for high returns over a period.
How your money is utilized The premium that you pay for ULIP goes to the expenses, insurance cover, and equity mutual fund. The premium that you pay goes to the expenses and stocks.
Flexibility This plan is flexible as you can decide the proportion of the amount that you will invest and it will be used for insurance cover and the proportion that will go towards equity investment. There is no flexibility as all the money that you are investing will be invested in equity.
Tax benefit This is available under Section 80C. Under ELSS of Section 80C.
Expense The expenses to manage ULIP are high as there is no limit set by IRDA. The costs to manage mutual funds are low since a particular limit is set by SEBI. The charges are for entry load, annual management charge, and exit load. In the majority of the cases, the entry and exit load is waived off.
Investment portfolio The investment portfolio is unknown. Portfolio tracking is likely when the insurance provider declares its holdings. The investment portfolio is declared quarterly.
Lock-in period Minimum of 3 – 5 years There is no lock-in period.
Security No security No security
SIP Yes Yes
Switching options It will allow you to switch between the funds linked to the plan. You can change the risk return. You cannot switch since there is no option available. The only option available is exiting the fund.
Additional benefits Extra loyalty benefits are offered by issuing extra fund units. There are no extra benefits.
Ideal term Long term Short to medium term
Liquidity Not very liquid. More liquid as it is more widely traded in the market.

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ULIP Vs Mutual Funds Which is Better in terms of Investment?

Let us check out which one is a better option – ULIP or Mutual Fund.

Mutual Funds

  • The majority of the mutual fund schemes come with flexible withdrawal options. Therefore, investors will be able to liquidate the fund at any time
  • It enables the investors to build a diverse portfolio by lessening the risk involved as investment is done in the market-linked funds
  • The investment portfolio is entirely managed by a financial expert who is called a fund manager
  • The lock-in period for mutual funds that are tax-saving is three years.

Unit-Linked Insurance Policy (ULIPs)

  • With ULIPs, you get the benefit of investment and life insurance cover
  • The policy comes with a lock-in period of 5 years and enables the investors to achieve their future financial goals smoothly
  • After the lock-in period is complete, one can partially withdraw from the investment
  • With ULIPs, you get many tax benefits under old as well as new income tax structures.

These are the basic differences that will help you to make up your mind and choose between ULIPs and Mutual Funds.

Also Read: Beginner’s Guide to ULIPs and Their Benefits

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FAQs on Difference Between Unit-Linked Insurance Policy and Mutual Funds

What is a Unit-Linked Insurance Policy (ULIP)?

A Unit-Linked Insurance Policy (ULIP) is a type of insurance product that combines insurance coverage and investment features. A part of the premium paid towards the policy goes towards the insurance coverage, while the remaining part is invested in various investment instruments such as stocks, bonds, or mutual funds.

What is a Mutual Fund?

A mutual fund is a type of investment vehicle that pools money from various investors to invest in a portfolio of stocks, bonds, or other securities. Investors in a mutual fund share the profits and losses in proportion to their investment.

What is the difference between ULIP and Mutual Fund?

The main difference between ULIP and mutual funds is that ULIPs combine insurance and investment features, while mutual funds are pure investment products. In a ULIP, a part of the premium paid goes towards insurance coverage, while the remaining amount is invested in various instruments. In a mutual fund, the entire investment amount is used to invest in a portfolio of securities.

What are the benefits of ULIP?

The main benefit of a ULIP is that it offers insurance coverage along with investment features. ULIPs also offer tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961. Additionally, ULIPs offer flexibility in terms of switching between investment options and choosing the level of insurance coverage.

What are the benefits of Mutual Funds?

The main benefit of mutual funds is that they are a pure investment product that offers diversification, professional management, and liquidity. Mutual funds offer the flexibility to invest in a variety of investment options, such as equity, debt, and hybrid funds. Additionally, mutual funds offer tax benefits under Section 80C of the Income Tax Act, 1961.

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May 18, 2022
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PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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