Which is a more profitable investment – ULIPs or Mutual Funds?


Though unit-linked insurance plans and mutual funds may seem similar, they are two different investment products serving different financial goals. Find out the differences between the two and choose the right investment product that works for you.

Investing in the stock market is considered as one of the best ways to earn high returns. Though both unit-linked insurance plans and equity-based mutual funds invest in stocks, the similarities end there. Here, in this guide, let’s take a look at the differences between these two popular investment products. Knowing the differences will help you choose the right option that works for you.

What are Mutual Funds? 

It’s primarily a trust. When you invest in a mutual fund, the fund manager invests your money (along with money from other investors) in the stock market on your behalf. A mutual fund is a broad classification, and there are various categories based on the investment duration, types of assets, risk-factors and more.

What are unit-linked Insurance Plans? 

As the name implies, it’s an insurance plan that also offers both life cover and opportunity to invest in the money market. When you invest in a unit-linked insurance plan, the insurance company reserves a portion of the premium for insurance cover, and the rest is invested in equities, debts, bond. You can choose the investment tool based on your financial goal and risk appetite.

The Differences between ULIPs and Mutual Funds

  1. Return on Investment 

Generally, the profits gained from mutual funds are higher than the returns on ULIP. It’s because investments in mutual funds have higher equity exposure, thereby having the potential for higher returns. With that said, the returns from mutual funds are subject to market risks.

The returns from the ULIPs are lesser than mutual funds. However, ULIPs offer assured sum, irrespective of market conditions. This is not possible with MFs.

  1. Lock-in Period

Unit-linked insurance is primarily an insurance product and has a lock-in period ranging from three to five years. Generally, mutual funds have a shorter lock-in period of around one year. However, mutual funds like the ELSS have a slightly longer lock-in period of up to three years.

iii. Tax Benefits 

Mutual funds (apart from ELSS) do not offer any tax benefits. The investments you make are liable to taxation as per your applicable tax brackets. Investments in ULIPs are eligible for tax deduction under Section 80C of the ITA. The maximum tax deduction is up to Rs. 1.5 lakhs per fiscal year.

  1. Insurance Cover 

Since unit-linked insurance plans are insurance products, it offers a sum insured to your family in case of your untimely death. Mutual funds do not provide any life insurance cover.

  1. Expenses 

As per the regulations of SEBI, the expense ratio on mutual funds cannot exceed 1.05%. There are no such limits for unit-linked insurance plans. Hence, the charges for ULIPs are generally higher than MFs.

So, which should you choose? 

Mutual funds are suitable for investors:

  • Who already have a term insurance plan
  • Look for high liquidity
  • Have medium to high-risk appetite

Unit-linked insurance plans are ideal for investors:

  • Who are looking for life cover along with their investment
  • Have a long-term investment horizon
  • And want to save tax

Make sure to do your diligent research on the two investment products before selecting one. Analyze your financial situation based on the features listed above and take the right investment decision.