ULIP Vs Mutual Fund: An Investment Guide for Beginners

If you’re considering expanding your wealth through investments, consider comparing the features of ULIP vs mutual funds. These attractive options can help you build long-term wealth while offering tax-saving opportunities. While both can help grow your wealth, they differ significantly in structure and purpose. 

Read on to explore these options to make an informed choice aligning with your financial goals.

What is a Unit Linked Insurance Plan (ULIP)?

These are insurance policies that also allow you to invest in the stock market. This way, they help you build returns over time. Here are some features to note:

• Premium is paid monthly, quarterly or annually  
• Portion of the premium you pay goes towards a life insurance cover, while the remaining amount is invested in various funds
• Allows choosing from different fund options such as equities, bonds or a mix of both
• Comes with a lock-in period of 5 years  
• At maturity, you will receive the value of the accumulated units

What is a Mutual Fund?

It’s an investment option managed by professionals. Here, contributions from multiple investors are pooled together to make investments on their behalf. Here’s how they work:

• These funds are then invested in a range of securities, such as bonds, stocks and money market instruments 
• You can invest in a lump sum or through a Systematic Investment Plan (SIP)
• Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds or other securities
• Professional fund managers select and manage them based on your specific financial goals
• You can choose from different types of mutual funds, such as equity funds, debt funds or hybrid funds
• Your returns depend on how well the assets within the fund perform
• No restriction of redemption, as most MFs don’t have a lock-in period

Difference Between ULIP and Mutual Fund

Refer to the following table to learn all about the characteristics of ULIP vs mutual funds:

Basis of Difference	ULIPs	Mutual Funds
Meaning	These are insurance products that combine investment and insurance benefits in a single plan	These are solely focused on investment, with no insurance component
Investment Purpose	These serve as both a market-based investment and an insurance product as a combination	These are investment tools aimed at wealth generation and achieving decent returns over time
Return on Investment	These invest in equities, debts or a mix of both, causing returns to vary	The returns vary depending on the selected scheme and are not guaranteed; they may offer higher returns compared to ULIPs
Lock-In Period	Have a lock-in period of 5 years, during which you cannot redeem your investments	Do not have a lock-in period, except for ELSS (which is 3 years)
Taxation	These premiums are eligible for tax deductions up to ₹1.5 lakh (under Section 80C) while the maturity amount is tax-free (under Section 10(10D))	Only tax deductions are available only for ELSS investments under Section 80C

Which is Better: Mutual Fund or ULIP

The ideal investment option for you depends on many factors. These are your goals, preferences and risk tolerance. For instance, a mutual fund could be the best option if you seek high liquidity and potential returns. 

However, if you’re prioritising security and have a long-term financial objective, a ULIP may be more suitable, as they combine the benefits of insurance and investment.

While all things may work in your favour, you should understand that both these options come with a fixed locked-in period. Thus, you need alternatives to get instant funds for urgent financial needs. This is where Fibe Loan Against Mutual Funds can come in handy. 

Get up to ₹10 lakhs in just minutes by pledging your mutual fund as collateral. Start by checking your eligibility, then submit your document and pledge your mutual fund with OTP. You can enjoy quick disbursal with flexible repayment options, so you don’t have to make any premature withdrawals. Apply now on our website or Fibe app to enjoy this additional perk of mutual funds.

FAQs on ULIP Vs Mutual Fund

Are ULIPs more suitable for long-term investments compared to mutual funds?

ULIPs are ideal for long-term investments if you appreciate the triple benefit of insurance, investment and tax advantages. On the other hand, if your main goal is to maximise investment returns without the need for insurance, mutual funds might be a better fit due to their flexibility and potential for higher returns over time.

What are the tax benefits of investing in ULIPs versus mutual funds?

ULIPs allow tax deductions on up to ₹1.5 lakh under Section 80C. Along with that, enjoy tax-free maturity proceeds under Section 10(10D).

ELSS mutual funds also offer tax deductions up to ₹1.5 lakh under Section 80C but gains are subject to capital gains tax upon redemption.

Which has lower charges and fees: ULIP or mutual funds?

The charges for mutual funds are typically much lower than those for ULIP schemes.

Can I switch between funds within a ULIP?

ULIP gives you the flexibility to switch between investment funds at any time during the policy term, enabling you to optimise your returns.

Should I invest in ULIPs or mutual funds for retirement planning?

Choosing between ULIPs and mutual funds for retirement planning depends on your priorities. ULIPs offer a combination of life insurance and investment, along with tax benefits. On the other hand, mutual funds focus solely on wealth creation.