ULIP vs. Mutual Funds: Where to Invest Your Money

Investing is the best way to effectively grow a fortune over time. Many people struggle to determine where to put their money as all plans come with different rules and regulations. Presently, two popular financial instruments are unit-linked insurance plans (ULIPs) and mutual funds. This article explains the differences between both these options to help you make an informed decision.

What is ULIP?

A common question asked by many potential investors is, “what is ULIP?” Well, it is a combination of a life insurance policy and other investment options. When you opt for it, the fund managers use a portion of your money to create your life insurance policy, and put the remaining amount in debt, equity, or a hybrid fund as per your investment goal and risk appetite. A Unit-linked insurance plan (ULIP) is a suitable option for long-term financial planning as it allows your money to grow over a period.

What is a mutual fund?

A mutual fund is a financial product that pools money from different investors with similar goals and puts the capital in various assets such as bonds and securities. Experienced and professional fund managers are responsible for investing the money on your behalf so that you get the best possible returns.

The three main types of mutual funds are as follows:

1. Equity funds

In this type of mutual fund, the fund managers put at least 65% of your money in equities. These funds can potentially offer higher returns, but their performance depends on the financial market. The different types of equity-based mutual funds are as follows:

  • Small-cap funds
  • Mid-cap funds
  • Large-cap funds
  • Multi-cap funds
  • Equity-linked savings scheme (ELSS)
  • Thematic funds
  • Index funds

2. Debt funds

When you opt for debt-based mutual funds, at least 65% of your money is invested in safe, fixed-income products like certificates of deposit, government bonds, treasury bills, and others. Below is a list of different types of debt funds:

  • Dynamic bonds
  • Income funds
  • Short-term debt funds
  • Ultra-short-term debt funds
  • Liquid funds
  • Gilt funds
  • Credit opportunities funds
  • Fixed maturity plans

3. Balanced mutual funds

This type of mutual funds balance risk and return by investing your money in both equity- and debt-based options. The fund managers can reallocate your funds between the debt and equity instruments depending on the financial market conditions. The different types of balanced mutual funds are as follows:

  • Equity-oriented funds
  • Debt-oriented funds
  • Monthly income plans
  • Arbitrage funds

You can invest in mutual funds in two ways, a systematic Investment Plan (SIP) and one-time payment.

  • SIP: This option allows you to invest small amounts in mutual funds over time. You may choose from different payment frequency options—bi-annually, quarterly, and monthly—as per your comfort.
  • One-time payment: If you have a lump sum to invest, this is the ideal option for you. In this scenario, you invest some amount in a mutual fund through one transaction and wait for your money to grow over time.

ULIPs vs. Mutual Funds - Where Should I Invest?

Deciding whether to invest in a ULIP or mutual fund will be easier if you compare both options based on returns and additional benefits. Read on to get a better idea.

1.  How ULIPs and mutual funds work?

When it comes to ULIPs vs. mutual funds with death cover, the benefit can differ based on your policy. For instance, if you wish to invest ₹25,000 a month to create a substantial life cover, the death benefit from both options will be as follows:

  • ULIPs: You can expect a death benefit of ₹30 lakhs in four years, and ₹41 lakhs in 10 years.
  • Mutual funds with life insurance: The death benefit will be ₹38 lakhs in four years, and ₹68 lakhs in 10 years.

2.  Benefits and reasons to invest in ULIPs

Some noteworthy ULIP benefits that make them a great investment option are as follows:

  • Life cover: ULIPs offer death benefits along with investment options. It ensures your loved ones remain financially secure in your absence.
  • Switching option: The fund-switching option lets you reallocate your money between equity and debt funds depending on your changing investment goals and the financial market condition. Insurers allow you a fixed number of free switches.
  • Tax benefits: Section 80C of the Income Tax Act, 1961 makes your investments tax-exempted up to ₹1.5 lakhs a year. Moreover, if your yearly premium is up to ₹2.5 lakhs, the maturity proceeds will be tax-free under Section 10(10D) of the Income Tax Act, 1961. However, if your annual premium is over ₹2.5 lakhs, the proceeds will not be tax exempt. Additionally, you do not have to pay any tax for fund withdrawal and switching.

3.  Benefits and reasons to invest in mutual funds

Mutual funds offer the following benefits, which make them an attractive investment option.

  • Fund managers: Experienced fund managers handle your investments to meet your goals while managing risk.
  • No lock-in period: Most mutual funds do not have any lock-in period. So, you can withdraw money from the fund as per your needs while adhering to the policy regulations.
  • Flexibility: Mutual funds are more flexible compared to other investment options. They offer benefits like fund switching, SIP, diverse investment avenues, and much more.
  • Tax benefits: ELSS is a type of mutual fund that offers tax benefits of up to ₹1.5 lakhs a year under Section 80C of the Income Tax Act, 1961. Although it has a three-year lock-in period, it is shorter compared to other tax-saving investment options.

Things to consider before investing in ULIPs

There are a few things that you must take into consideration before investing in ULIPs. These include the following.

  • Personal goals: ULIPs are suitable for wealth creation in the long run. So, you must determine your future financial goals before investing. If you want to build a retirement fund or accumulate money for any other significant purpose, long-term investment in these plans may be beneficial.
  • Lock-in period: They have a five-year lock-in period. Moreover, if you surrender the policy for any reason within the first three years of investment, you may lose the life cover.
  • Charges: ULIPs entail multiple associated fees such as a 1.35% fund management charge, premium allocation cost, administrative charge, and much more. The insurance company deducts these costs from the premium. Furthermore, you have to pay an underwriting fee and commission. All these ULIP charges need to be paid when purchasing the policy and may affect your overall return.

Tips to choose the best ULIPs

To choose the best ULIPs for investment, you must keep the following tips in mind.

  • Determine how much life insurance cover you need.
  • Choose a plan according to your financial goals.
  • Find out about the fees your insurer charges.
  • Learn about the features of different ULIPs before buying one.
  • Know about all the tax benefits.

Consider investing in mutual funds and term insurance instead of ULIP (with an example)

As mentioned earlier, ULIPs offer a death benefit of ₹30 lakhs in four years and ₹41 lakhs in 10 years for a monthly investment of ₹25,000. But, if you invest the same amount in a mutual fund and ₹1,000 per month in a term policy separately, you will get a higher life cover.
For the monthly investment of ₹26,000, you will get a life cover of over ₹1 crore in four years and 1.43 crores in 10 years.
For low-cost and flexible investment, opt for a term insurance cover that is 15 times your yearly income and put the remaining amount in mutual funds.


1.  What is the sum assured in ULIP?

The sum assured is the minimum amount an insurer guarantees to pay the nominee in the case of the policyholder’s untimely demise during the policy tenure.

2. What is fund value in ULIP?

A fund is made of units that have a Net Asset Value (NAV, which can change every day. The total monetary value of the units owned by you is known as the fund value. To determine this, multiply the NAV of each unit on a particular day by the total number of units you have.

3.  Is ULIP better than mutual funds?

ULIPs allow you to build a fortune over time while providing a life insurance cover under one policy. However, if you invest in a mutual fund instead and buy a term life insurance policy separately, it will guarantee a significantly higher death benefit.

4. Which is better investment ULIPs or mutual fund?

Mutual funds offer better returns than ULIPs

5. Why you should invest in ULIP now?

Unit-Linked Insurance Plan (ULIP) will have the benefit of both life insurance and investment returns. You should analyse your personal financial goals, lock-in period and charges before investing in a ULIP because the returns might be lesser compared to Mutual funds.

In this article

Mutual Fund Investment, Financial Planning, FinForAll By Jupiter

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