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ULIP VS Mutual Funds: The More Beneficial Investment Avenue

31 December 2021
3 minutes

Unit Linked Insurance Plans and mutual funds are two popular investment options today. Both allow retail investors to increase their wealth over the long term. Mutual funds and ULIPs differ vastly in terms of objectives, features, returns and various other aspects. 

Individuals looking to invest in any of these investment options has to choose depending on their financial goals.

Here is a detailed rundown of ULIP vs mutual fund to help prospective investors make a suitable decision. 

Difference between ULIPs and Mutual Funds

  • Return on investment

The first thing that an investor looks for in any investment option is the type of return it provides. It is, therefore, crucial to have a clear idea about ULIP vs mutual fund returns. Unit Linked Insurance Plans can offer low to high returns depending upon the asset allocation.

Mutual funds, on the other hand, can offer higher returns. Similar to ULIPs, the return potential depends upon the equity and debt exposure. That said, ULIPs are associated with lower financial risk.

  • Product type

ULIPs are insurance products that offer a combination of investment and insurance benefits under a single integrated plan. These plans offer an opportunity for wealth creation along with a financial cover for policyholders’ family. Mutual funds are entirely investment options. 

  • Lock-in period

Unit Linked Insurance Plans come with a lock-in period of 5 years. Where as in open-ended mutual funds there is no lock-in period. However, in case of ELSS the lock-in period is 3 years. Close-ended funds also have a lock-in period. However, individuals can subscribe to a close-ended scheme only during the NFO period. You can redeem your units only after a specified timeframe. 

  • Expenses

The charges associated with ULIPs can be higher. These charges include administration charge, premium allocation charge, mortality charge, and fund management charge.

The charges for investing in mutual funds include expense ratio and exit load. The expense ratio is a charged by mutual fund houses. Similarly, the exit load is the fee that an investor needs to pay for exiting a mutual fund prematurely. 

  • Tax benefits

Individuals can claim tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act on the premiums paid towards a ULIP. In addition, the maturity amount is tax free under Section 10(10D). 

In the case of mutual funds, a tax deduction is available only for investment towards ELSS under Section 80C. Investing in any other type of mutual fund does not come with the benefit of tax deduction. 

  • Risk cover

As noted above, ULIPs are a combination of insurance and investment. Further, in case of sudden demise of the policyholders, ULIPs offer financial stability for the family.  Mutual funds do not offer risk cover like ULIPs. 

Mutual funds are a suitable investment option for:

  1. Individuals who have a low to high-risk appetite
  2. Investors seeking liquid investments 
  3. Individuals who have a medium-term or short-term investment horizon
  • Transparency

In comparison to mutual funds, ULIPs have a lesser transparent structure regarding expenses, and risk management.  

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww

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