Missed filing your ITR?

You can still file it on Cleartax in just minutes

Where to invest – ULIPs vs Mutual Funds?

Updated on: Feb 8th, 2023

|

13 min read

social iconssocial iconssocial iconssocial icons

There are various investment options available which help you accumulate wealth over time. You need to invest in those options that have the potential to offer high returns for your long-term financial security. We have covered the following in this article:

ULIPs vs Mutual Funds- Which is a Better Bet?

There are certain life events when you require a substantial sum. These can be purchasing or building a house, higher education and marriage of your children, and retired life. Considering the inflation rate, you must identify the avenues where your investment will generate the highest returns as per your risk profile.

Stock market investment has the potential to provide the highest returns among all investment options, but the risk involved is reasonably high. There are various channels through which you can invest money in the equity markets while balancing your long-term goals. Two of the most popular options among investors are mutual funds and ULIPs.

What are Mutual Funds?

Mutual funds are one of the most popular investment options today. They are primarily a trust wherein money from individual and institutional investors having a common objective is pooled together to invest in a variety of equity and debt instruments.

Mutual funds are managed by fund managers who make investment decisions on behalf of the investors. Mutual funds are of various types and are identified based on different parameters such as the type of market, the duration, and the risk factor.

Fund managers distribute any profit generated from the assets allocated in a fund among investors after deducting the expenses and levies. This amount is calculated by determining the Net Asset Value (NAV). 

However, there are some unique types of mutual funds that are passively managed. Fund managers have a low to no role in managing those funds. An index fund is one such fund. The expense ratio is relatively low for passively managed funds for this reason. 

What are ULIPs?

ULIPs are amongst the latest financial products introduced for investors. Unit-Linked Insurance Plans (ULIPs) are insurance policies that offer investors an insurance cover while generating returns based on investments in various avenues. The insurance company floats a new scheme in a similar way to mutual funds and invites investors. ULIPs invest in equity shares, debt instruments, and bonds.

Basically, ULIPs are a combination of insurance products and investment plans. You can invest in equity, debt, or a combination of both asset types. You also have the option to switch between asset classes when required. 

ULIPs offer some unique benefits, such as partial withdrawal, several tax benefits, and a choice of life cover. There is also premium protection even if this is a partially market-linked product. 

Difference between Mutual Funds and ULIPs

At first sight, these two options might seem identical, but they are not. There are several differences between these two investment options. The following are some of the significant difference between ULIPs and mutual funds:

Return on investment

The returns from ULIP are on the lower side. The reason being, ULIPs promise a fixed sum whether or not the investment plan makes money. In comparison, the returns from mutual funds vary depending on the risk factor. Equity mutual funds have the potential to offer higher returns, while debt mutual funds offer slightly lower returns.

Lock-in Period

ULIP essentially is an insurance product. Therefore, insurance companies define the lock-in period for such an investment before which the investment cannot be redeemed. ULIPs have a lock-in period ranging between three to five years, depending on the nature and structure of the investment scheme. Mutual funds generally have a lock-in period of one year, but in some cases, like ELSS, the lock-in period is three years.

Transparency

ULIPs are highly sophisticated products which offer a mix of risk cover and investment. These have a less transparent structure concerning the underlying expenses and asset allocation. Mutual funds are relatively open about the fee charged and the holding in the portfolio.

Taxation Benefits

Investment in ULIPs is eligible for Income Tax deduction under Section 80C of the Income Tax Act, 1961, i.e. you can claim tax deductions of up to Rs.1.5 lakh a year on your ULIPs investment. Whereas mutual funds offer a tax deduction only against investment in ELSS. Investing in any other mutual fund scheme will not provide tax deductions and redemption of are subject to taxation as per the applicable tax bracket.

Expenses

Mutual funds offer the benefit of low costs and professional management. SEBI has capped the expense ratio on mutual funds to 1.05% while there is no such limit for ULIPs. The charges for ULIP schemes can go much higher than mutual funds.

Risk Cover

ULIPs come with an in-built insurance plan that offers the sum assured to the family in case the policyholder dies within the term of the policy. However, in the case of mutual funds, there is no risk cover by way of insurance. You need to buy a separate insurance plan and pay an additional premium for the same if required.

Ideally, mutual funds are suitable when you have the following:

(i) A short-term or a medium-term investment horizon. 
(ii) Have a term insurance plan already in place. 
(iii) Want high liquidity.
(iv) Have a high or medium risk appetite.

Comparison between ULIPs and Mutual Funds

Here is a table of differences for better understanding: 

Parameters 

ULIP 

Mutual Fund 

Objective

Wealth Creation and Insurance Cover

Wealth Creation

Regulatory Body

Insurance Regulatory and Development Authority of India (IRDAI)

Securities and Exchange Board of India (SEBI)

Duration

Long term, lock-in period of 5 years maybe applicable

Short, mid and long-term as per investor

Tax Benefits

Premium paid is tax deductible, and maturity amount is tax exempt

Only ELSS qualify for tax deduction u/s 80C

Management Expenses

Approximately 1.35%

Approximately 2.50%

Payment Mode 

You need to pay a premium at regular intervals or pay a lump sum. 

You can invest through SIP or lump sum. 

Ideal Investment Period 

Long term 

Long or mid-term. For some mutual funds, such as Liquid Funds, it can also be short-term. 

Risk Meter 

Comparatively secure. 

Not secure. 

Lock-in period 

ULIPs have a lock-in period of 5 years. 

Mutual funds do not have lock-in periods, except ELSS, which comes with a 3 years lock-in period.

Ideally, mutual funds are suitable when you have the following:

  • A short-term or a medium-term investment horizon. 
  • Have a term insurance plan already in place. 
  • Want high liquidity. 
  • Have a high or medium risk appetite.

Which ULIP Is Ideal for You?

  • You are looking for a long-term investment horizon.
  • You want a life-cover built-in with your investment.
  • You have a low to medium risk appetite.
  • You want to save on your taxes.

The decision as to which investment scheme you should choose depends on the answer to the questions mentioned above. Never rush into taking any investment decision; exercise due diligence and research before finalising. Also, you need to base your decision on your investment goals. For example, if you are looking for high liquidity and high returns, a mutual fund is your ideal choice. On the other hand, if you are looking for security and have a long-term objective, you can go for ULIP with the dual benefit of insurance and investment. 

Frequently Asked Questions

What are the tax benefits of ULIP? 

Premium payments towards ULIP and maturity amount are eligible for tax deduction under Section 80C) of the Income Tax Act, 1961, up to Rs.1.5 lakh per financial year. This will be applicable only if the premium amount is below 10% of the total sum assured. Maturity payout is also exempted under Section 10(10D). Also, death benefits paid to the nominee will not be taxed.

What is the expense ratio for mutual funds? 

The expense ratio is the operational and professional management fees for mutual funds. An ideal expense ratio falls between 0.50% and 0.75%. The expense ratio is important to consider when investing in mutual funds as it affects your return. 

What is the right time to invest in mutual funds? 

The answer to this question would be as early as possible. You should start investing as early as you can because you will be able to reap the benefits of compounding even more, resulting in higher returns. 

Do mutual funds have an infinite investment period? 

Mutual fund investment period depends on the investors and their financial objectives. Unlike some mutual funds such as ELSS which has a lock-in period, there is no fixed investment term for mutual funds. 

Which is a more flexible investment – ULIP or mutual fund? 

ULIP and mutual funds both are flexible investments. You can decide how much of your fund will go towards insurance premiums and how much will be invested in market-linked instruments. Similarly, in mutual funds, you can choose which type of asset to invest in, equity, debt, or a combination of both. 

inline CTA
Invest in Direct Mutual Funds
Save taxes upto Rs 46,800, 0% commission
CONTENTS

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption