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ULIP vs Mutual Funds – Which Investment gives you better returns?

With increasing disposable income at hand and awareness of financial planning, more and more people are considering to invest their savings for a better and secured future. This has given rise to numerous financial products in the market.

Today you will find a variety of financial instruments available in the market which offer promising returns. Selecting one or few options out of them can be a daunting task. Moreover, making the right choice of financial instrument is also important because you are putting in your hard earned income in these investment avenues and want your money to grow over time.

To assist you with money investment tips, we have brought to you two of the popular investment products that have given good return to the investors over a span of time. They are Unit Linked Insurance Plans and Mutual Funds. In this article, you will understand the basic concepts of ULIP and mutual funds, ULIP plans vs. mutual funds, and much more.

Let us begin by first understanding what is ULIP?

What Is ULIP?

Unit Linked Insurance Plan is a financial product that offers insurance policy along with investment in different investment avenues. The companies that provide ULIPs bifurcate your money into two parts. Some amount of money is used to provide you with the insurance policy and the remaining amount of money acts as an investment. As an investor, you can generate returns with the money invested by the company. The money is invested in debt instruments, equities, bonds, etc.

The meaning of ULIP must have clarified every individual’s doubt about why should I invest in ULIP. Let us now understand what are mutual funds?

What are Mutual Funds?

Mutual Funds are the most popular investment option among investors. The mutual fund companies collect money from different investors and pool them to invest in various investment classes such as stocks, bonds, money market instruments and other assets.

The mutual funds hire dedicated fund managers who look after all the investment decisions on your behalf. Thus, a mutual fund gives you access to a professionally managed portfolio making it an ideal choice for investors who do not know much about investing. All you need to do is, choose a mutual fund scheme depending on your financial goals and rest will be taken care of by the fund house. The mutual fund company structures and maintains your portfolio in a way to match your investment objectives.

After understanding the meaning of both investment options, let us now learn about the difference between ULIP and mutual fund.

Difference between ULIP and Mutual Fund / ULIP vs. mutual fund

• When you buy a mutual fund, the motive is solely investment. On the contrary, when you buy ULIP, it gives you insurance cover and also acts as an investment.
• When you wonder why should I invest in ULIP, the answer is simple – In case of ULIP, you are eligible for a deduction from your taxable income as per section 80C of the Income Tax Act. Whereas, in case of mutual funds only Equity Linked Saving Schemes (ELSS) are eligible for tax deductions.
• Most mutual funds are liquid in nature. They can be withdrawn within a year. However, 1% of the fund value is deducted as exit load. On the other hand, ULIP is not so liquid in nature. Their liquidity is restricted due to a minimum lock-in period of 5 years.
• The returns in mutual fund vary depending upon the performance of the stock market and risk factor. The mutual funds which have higher exposure to equity can generate higher returns because of the higher risk. Mutual funds with exposure to debt market give slightly lower returns. On the other hand, the returns from ULIPs are lower in comparison to mutual funds. This is because ULIPs provide insurance cover along with an investment avenue.
• ULIPs offer insurance plans that cover the life of the policyholder and in case of an unfortunate event, it gives the assured sum of money to the policyholder’s family. But in the case of a mutual fund, there is no such insurance cover.
• When a comparison is made between ULIP plans vs. mutual funds, it is important to consider the expenses. The expenses in ULIPs are higher in comparison to mutual funds. This is because, in the case of mutual funds, SEBI has capped the total expense ratio to 2.25% . No such limit exists for ULIPs.

The above mentioned points suggest ULIP vs. mutual fund differences. Investors often have a question in mind i.e. why should I invest in ULIP or mutual fund. Well, to solve this doubt, we list down certain points that will help investors in taking the right investment decision.

When You Can Invest In Mutual Funds
• When the time horizon is short term or medium term.
• When you want to invest in a highly liquid asset.
• When you have a good risk appetite.
• When you already have an insurance policy in place.

When You Can Invest In ULIPs
• When your investment horizon is for the long term.
• When your risk appetite is low.
• When your aim is to save a good amount of tax.
• When you want insurance policy along with the investment.

Therefore, before taking any investment decision about ULIP vs. mutual fund, you must consider the above mentioned points. You can even purchase these plans from a reputed broker like IndiaNivesh Ltd. They can further assist you in the money investment tips and can guide you on various investment options available to you.


Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.