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ULIP Vs Mutual Funds – Which is better investment?

ULIP Vs. Mutual Funds – Which is better investment option for you

There are several investment options in India. However, one should pick-up right investment option based on financial goal, risk appetite and tenure. There are two investment options ULIP and Mutual Funds, which often look identical, however, there are several differences between these two. Among ULIP Vs Mutual Funds, which is better investment option suitable for you?

What is a Mutual Fund?

Mutual Funds are one of the popular investment options in India. Here, mutual fund scheme would pool money and invest in equity or debt based on the investment objective of the fund.

The fund manager would be the in charge of picking up right stocks or debt instruments to invest. Investors can invest as low as Rs 100 per month through SIP or as low as Rs 500 lump sum in mutual funds.

What is ULIP?

Unit Linked Insurance Plan aka ULIP is the insurance cum investment scheme. In ULIP, investors need to invest every year. ULIPs provide insurance risk coverage and beyond this, it would invest in equity or debt depending on the option chosen by the investor. The returns are marked linked. There are various benefits of investing in ULIPs in India.

Till 2010, there are many ULIPs that had high charges. IRDA guidelines on ULIPs post 2010 has helped investors to some extent.

ULIP Vs Mutual Funds – Which is better investment option for you?

Now that we understand the definition of ULIP and Mutual Funds, let us check the difference between these two investment options.

#1 – Simple to understand

Mutual Funds are simple to understand. One can choose mutual fund based on the timeframe and risk appetite.

On the other hand, ULIPs are little complicated. One needs to understand the terms and conditions in ULIPs before taking the policy. This is one reason people go for some of the best term insurance plans.

#2 – Minimum investment

Investors can invest as low as Rs 100 per month through SIP or Rs 500 lump sum in mutual funds. However, ULIPs come with higher amount. Majority of the ULIPs come with yearly premium.

#3 – Returns on these investments

Mutual fund returns would depend on the equity component. Higher the equity component, higher the returns and vice versa. Mutual Funds can provide high returns if invested in medium to long term. Typical returns from equity funds ranges between 12% to 15% per annum.

ULIP comes with low returns. Beyond life risk coverage, ULIPs can provide 4.5% to 5.5% returns if invested in medium to long term.

#4 – Lock-in Period

ELSS mutual funds have lock-in period of 3 years as they provide tax benefits. All other mutual funds do not have any lock-in period. One can withdraw any time they want.

ULIPs comes with a 5 year lock period. One cannot exit before this period.

#5 – Income Tax Benefits on investments

ELSS mutual funds provide tax rebate u/s 80c up to Rs 1.5 Lacs.  There are no tax benefits of investing in other types of mutual funds.

Investment in ULIPs would quality for tax benefits u/s 80c up to Rs 1.5 Lacs per financial year.

#6 – Management Fees and Charges

There is a very low management fee in direct plans of mutual funds. Typical expense fees are up to 1%. However, if one opts for regular plans, they need to pay expenses up to 3%.

Under ULIPs, while management fee is inline and comparable with mutual funds, there are several other charges like allocation charges, mortality charges, surrender charge etc., All these would eat away some of the investments done in ULIP. This the main reason for ULIP providing low returns. This is one of the reason, individuals opt for a good term plan and ignore ULIP.

#7 – Life Risk Coverage

ULIPs provide life insurance coverage, which would be sum assured. However, in mutual funds, there is no such insurance coverage.

ULIP Vs Mutual Funds – Which is better investment option for you?

Now that we understood the difference between these two options, let us check which one suits you better.

Is ULIP Ideal for you?

ULIP is ideal if you fall in below category.

You are looking for insurance cum investment options.

You have low to moderate risk appetite.

You are okay with low returns.

You want to save taxes on your investment.

Is Mutual Fund best investment for you?

Consider a mutual fund when you have the following needs:

Want to invest for short term, medium term or long term. You should pick-up right fund based on tenure.

You already have a life insurance coverage or low cost term insurance plan.

Want money in case of any emergency.

Willing to take medium to high risk.

Looking for moderate to high returns by investing in medium to long term.

Suresh KP

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