ULIP Vs Mutual Fund

ULIP Vs Mutual Fund – Which is Better?

ULIP is better for investors looking to invest in a scheme that provides the benefits of assured returns with a life insurance policy as well as provides market-linked returns with some investment in equity and debt instruments. On the other hand, mutual funds are better for investors looking to invest in pure market-linked instruments, which helps in wealth creation. 

This article covers: 

ULIP Meaning 

The full form of ULIP is Unit linked insurance policy, it is a type of insurance that helps investors reach their long-term financial objectives while also providing life coverage in the event that a policyholder passes away. The assured amount of a ULIP scheme is transferred to the nominee (as a death benefit). 

However, you also need to note that ULIP is not your traditional insurance policy; instead, it combines two different plans where one part of your investment is allocated directly to the life insurance policy while the other part is invested in a manner similar to the mutual funds. Debt instruments, equities, and bonds are the security assets in which ULIPs invest. 

What Is a Mutual Fund In Simple Words?

A mutual fund pools numerous investors’ capital to make various investments in the financial markets, including stocks, bonds, and other securities. The mutual fund is operated by professional fund managers who are solely responsible for undertaking any kind of investment decision, and they do this on behalf of the investors who have already put their money into the mutual fund. 

If an investor does not want to deal directly with the stock market but instead is looking for a balanced portfolio, then the mutual fund is the best option for them.

ULIP Vs MF – Comparison

Here is a detailed comparison of ULIP vs Mutual Funds:

FactorsULIPMutual Fund
Regulatory authorityIRDAI, or Insurance Regulatory Development Authority of IndiaSEBI or Securities and Exchange Board of India
ExpensesThe charges in ULIP include fund management charges, premium allocation charges, mortality charges, and administration charges.Normally the investors need to pay operation fees and professional management fees. Depending on the nature of the scheme, you may also need to pay the exit load charges.
PurposeThe main purpose of ULIP is to offer both security and generate revenue for the customers.The purpose here is to generate significant wealth through long-term investment. 
Risk coverageThe policyholder’s nominee is offered a lump sum in the event of the policyholder’s death.The entire investment amount gets transferred to the policyholder’s nominee.
Lock-in periodThe lock-in period for ULIP schemes is 5 years.Mutual fund schemes do not have any kind of lock-in period.
Tax benefitsAccording to Section 10D and 80C of the Income Tax Act, 1961, by investing in a ULIP scheme a policyholder can opt for a tax deduction of up to Rs. 1.5 lakh. Moreover, the death benefit is completely tax-free.In a mutual fund, if you invest in the ELSS scheme, only you will be eligible for a maximum tax deduction of Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.
Return on investmentThe ROI from ULIP schemes can be zestful because it mainly deals with equity and debts.Based on the nature of the scheme mutual funds returns from mutual fund investments can vary.
Policy TermIt is a long-term policy.The duration of the policy depends on the investors’ choice. 

Difference Between ULIP And Mutual Fund

The biggest difference between a Unit Linked Insurance Plan (ULIP) and a Mutual Fund is that a ULIP is a combination of insurance and investment, whereas a mutual fund is only an investment vehicle. 

ULIP vs Mutual Fund Motive of Investments

In terms of nature, Mutual funds are pure investment products with the main objective of generating significant wealth for the investors. If someone invests in the mutual fund scheme for the long term, then they can certainly reap huge benefits from the same. On the other hand, ULIPs are more of an insurance product that comes with the additional benefit of return on investment. It primarily works as a life insurance coverage while being linked with equities.

Holding period of ULIP and Mutual Fund

As mentioned above, a Unit-Linked Insurance Plan or ULIP comes under the insurance plan category, and just like all insurance plans, it comes with a lock-in period. The minimum lock-in period for a ULIP is five years. Alternatively, mutual funds have no lock-in period except for ELSS or Equity Linked Saving Scheme mutual funds. If you opt for an ELSS mutual fund scheme, your entire investment will be locked for 3 years.

ULIP vs Mutual Fund Tax Advantage

In terms of tax benefits, ULIP is a better investment choice because it can offer up to Rs. 1.5 lakh tax deduction according to Section 10D and 80C of the Income Tax Act, 1961. 

ULIP vs Mutual Fund Regulatory Authorities

All the ULIP schemes are regulated and scrutinized by the IRDAI or Insurance Regulatory Development Authority of India, whereas SEBI, or the Securities and Exchange Board of India, is responsible for monitoring and handling the mutual fund schemes available in the market.

ULIP vs Mutual Fund in Terms of ROI

The returns you receive from mutual funds depend on the nature of the mutual fund (including its risk factor). Nevertheless, they can offer higher returns to investors. Especially equity mutual fund schemes can offer handsome returns to investors. ULIPs offer investors a predetermined amount of money, which is why the returns from ULIPs are less than mutual funds. 

Charges Involved in ULIP vs Mutual Funds

In mutual funds, the investors need to pay the expense ratio, which is the amalgamation of the operational fee as well as a professional management fee. Some mutual funds can also charge you for leaving the mutual fund scheme, known as exit load. As for ULIP, there is no such limit which means the charges for ULIP can increase significantly. Usually, the investors need to pay fund management charges, mortality charges, premium allocation charges, administration charges, etc.

ULIP vs Mutual Fund Systematic Investment Plan Option

Mutual fund schemes offer systematic investment plan options, which means you can invest a certain amount of money monthly instead of directly investing a lump sum. On the other hand, ULIP does not offer your SIP options, but you can certainly choose the monthly premium option when selecting a ULIP scheme.

ULIP vs Mutual Fund Option of Investment Transfer

A ULIP policyholder has the capacity to move their investment units (both partially and fully) from one policy to another without getting involved in exit load or taxes. However, you cannot get the same facilities if you have invested in mutual funds. If someone wants to switch policies, they must pay exit load and capital gain taxes.

ULIP vs Mutual Fund Investment Horizon

If you are investing in ULIP, you cannot touch your money for at least five years. However, during this time period, as a policyholder, you can certainly surrender the policy and get your money in case of emergencies. When it comes to mutual funds, there is no time period involved which means you can deposit and withdraw money at any given time.

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ULIP Vs Mutual Fund- Quick Summary

  • While Mutual Funds are purely investment products, ULIPs are insurance products that provide both investment and insurance benefits.
  • ULIPs are a combination of two different plans, with one part allocated to life insurance and the other invested in securities such as equities, bonds, and debt instruments.
  • Mutual funds are managed by qualified fund managers who act as the investors’ agents when making investment decisions. Investors can select mutual fund schemes based on their investment objectives and risk tolerance.
  • In ULIP, funds are locked in for at least 5 years, but policyholders can surrender it for emergencies. Mutual funds have no lock-in period, allowing investors to deposit and withdraw funds anytime.
  • Mutual Funds are professionally managed pools of funds, while ULIPs offer a choice of investment options, including equity, debt, or a combination of both.

ULIP Vs Mutual Fund- Frequently Asked Questions

1. What is the difference between ULIP and Mutual funds?

The biggest difference between ULIPs and mutual funds is that ULIPs offer a combination of insurance and investment, while mutual funds solely offer investment opportunities.

2. Which is better, ULIP or mutual fund?

Choosing between ULIP and mutual funds depends on your goals and requirements. For example, if you opt for a ULIP, you will receive both life insurance coverage and investment, and if you want to invest in the stock market, investing in a mutual fund is a suitable option. 

3. Is ULIP a good investment option?

Yes, ULIP is certainly a good investment option as you will be able to receive life insurance coverage, secondly, you will be eligible for a lump sum amount after the maturity of the investment, and lastly, you will also be eligible for tax benefits during tax filing. 

4. Can I switch from ULIP to a mutual fund?

No, you won’t be able to directly switch from ULIP to a mutual fund because these are two different investment tools regulated by two different authorities. However, if you are unsatisfied with your current ULIP policy, you can opt for a different type of fund. 

5. How risky is ULIP?

ULIP policies are considered slightly risky investments because of their inherent investment components. The returns you will receive from ULIP investment are based on the market conditions because it mainly deals with equity and debt instruments. 

6. What are the disadvantages of ULIP?

  • ULIP has a five-year lock-in period, and investors won’t be able to withdraw money from the fund.
  • ULIP is not an ideal tool for short-term investments because of the constant market fluctuations.

7. Which one is better: SIP or ULIP?

If they want to generate wealth through long-term investments, then SIP is the best option. However, people who are looking for an insurance policy with investment benefits can choose to invest in ULIP.

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