Difference between ULIP vs MF
- 6 min read
When planning to invest your hard-earned money, you must wonder where to invest and how to get maximum returns. Among the top investment options, th
ULIPs are a mixture of investment and life insurance, in which a portion of your investment goes towards life insurance and the remaining portion gets invested in market-linked funds.
ou can invest in debt funds, equity funds, or a combination of the two, depending on your goals and risk tolerance. Since its establishment in 1971, ULIPs have made considerable progress. The first ULIP was created by the Unit Trust of India (UTI) in 1971, and the Life Insurance Corporation (LIC) did the same in 1989.
What Does a Mutual Fund Mean?
Mutual funds invest in a variety of assets, including money markets, bonds, and stocks, by pooling the capital of numerous market participants. Mutual funds are the best choice for individuals who wish to purchase such securities but lack the time or expertise to do so.
These funds are managed by professionals who strategically distribute the assets to maximise investors’ income and financial gains.
If you want to invest in mutual funds, PL Capital Group – Prabhudas Lilladher is the right option. You can open a Demat account for free and invest in the top mutual funds in India.
Advantages of Investing in ULIP and Mutual Funds
Both ULIPs and mutual funds offer several advantages, which cater to different types of investors. Before understanding the difference between mutual fund and ULIP, let us understand their benefits:
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Advantages of ULIP
- ULIPs offer both investment and life insurance coverage.
- To adjust to changing market circumstances, you can also switch between debt and equity funds within the ULIP.
- Under Section 80C of the Income Tax Act, ULIPs are eligible for tax deductions.
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Advantages of Mutual Funds
- Except for tax-saving funds, the majority of mutual funds do not have a required lock-in period, allowing you to access your money whenever you need it.
- They are ideal for short- to medium-term goals as they offer simple withdrawal choices.
- Over a longer time horizon, mutual funds can produce superior returns since they do not incur insurance expenses.
If you want to invest in mutual funds, you can download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free.
ULIP vs Mutual Funds: Key Differences
With differing risk profiles, fees, and possible returns, ULIPs and MFs cater to distinct investor demands. Here are some differences between ULIP vs MF:
| Characteristics | ULIPs | Mutual Funds |
| Investment goal | Important for earning insurance. | Designed for generating high returns and wealth. |
| Return on Investment (ROI) | may yield returns that range from low to high, depending on the asset allocation, but can also fluctuate. | Returns can vary and be low or high, but may provide higher returns compared to ULIPs. |
| Product Type | Combines insurance with investment under one cohesive plan. | Completely investment-based option. |
| Lock-In Period | For these investments, insurers impose a lock-in term, usually of five years. Investors are unable to withdraw their money before the end of this lock-in period/ | No lock-in period. However, for the Equity-linked Savings Scheme (ELSS), the lock-in period is for three years. There is also a lock-in period for closed-end funds. Individuals can only sign up for a closed-ended plan, which is during the NFO period. |
| Taxation | Tax deductions are available up to INR 1.5 lakh under Section 80C of the Income Tax Act for ULIP premiums paid. In addition, the maturity amount is tax-free under Section 10(10D). | Only ELSS investments are eligible for a tax deduction under Section 80C in mutual funds. |
| Risk Coverage | ULIPs provide the family with financial security in the event of the policyholder’s untimely death/ | Do not provide risk coverage/ |
| Loyalty Benefits | Can receive loyalty benefits for long-term investments. | No loyalty benefits are available. |
Factors to Consider Before Choosing Between ULIP and Mutual Funds
- Choose if your main goal is to maximise your return on investment or to get insurance coverage as an ROI.
- While mutual fund investments are for shorter to medium duration investments, ULIPs typically have longer commitments due to the required lock-in period.
- Think about how quickly you would need to spend your funds. ULIPs have long lock-in periods and are less liquid than mutual funds.
- Examine your risk tolerance as mutual funds include market volatility and possible rewards.
Final Thought
Based on the differences between ULIP vs MF, mutual funds are the preferred choice for investors who prioritise liquidity and cost effectiveness. Conversely, ULIPs are appropriate for investors who need life insurance protection with their assets. When deciding between the two, investors should evaluate their priorities and financial objectives.
Opening a Demat account for free with PL Capital can help you invest in mutual funds. PL also offers you to get personalised investment recommendations from their experts.
Frequently Asked Questions
1. Which is better among ULIPs and mutual funds for tax saving?
Under Section 80C, both ULIPs and ELSS mutual funds offer tax advantages. ULIPs combine investment and insurance and have a longer lock-in period of five years. ELSS gives more liquidity with a shorter lock-in time of three years.
2. What are the drawbacks of investing in ULIP?
There are numerous drawbacks to investing in ULIPs. These include a 5-year lock-in period without liquidity, high upfront costs such as fund administration and premium allocation fees that can lower early returns, and market-linked risks.
3. Do ULIPs charge more than mutual funds?
Yes, ULIP fees are often higher than those of mutual funds. While mutual funds mainly charge an expense ratio for fund administration, ULIPs include additional fees, such as mortality charges and premium allocation.
4. Which category of mutual fund gives the highest return?
Equity funds generally offer high returns compared to other categories.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
