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Difference Between ULIP And Mutual Funds

Unit linked investment plan (ULIP) and mutual fund are two different forms of investments which confuses most of investors. In broader terms, ULIPs are insurance cum investment product which provides a mix of both insurance & investment in one single policy whereas mutual funds are pure investment product. Both these investments are market linked i.e subject to market risk which means if the performance of the financial market will improve the value of the funds of the investor will also go up and vice versa.

Investor can invest in either of the investment according to his risk appetite. As both ULIP and mutual fund offers variety of funds like equity fund, debt funds, income fund, balanced fund etc. investor can choose to invest in one or multiple types of funds in both these investment according to his risk appetite. Higher the risk higher the returns on investment. Investor can choose to invest either monthly or lump-sum.

We have already described ULIP (Unit Linked Insurance Policy) and MF (Mutual Funds) in detail in our earlier posts. Lets have a brief comparison of ULIP vs MF specific to Indian market.

ULIP Vs Mutual Fund

ULIP Vs Mutual Fund

Point Of Difference


Mutual Funds

Regulators IRDA SEBI
Primary Objective Insurance + Investment Pure Investment
Type Of Investment Good for long term investors Good for short to medium term investors
Flexibility Limited Flexibility – can switch to funds offered by your policy company Very Flexible – can switch to any fund available in the market
Entry Load Huge entry load, from 5 to 40% No or small entry load
Liquidity Limited Liquidity, minimum 5 years of investment required Very Liquid, Sell your MF anytime except ELSS
Tax Benefit All ULIP investments are qualified for tax benefit under section 80C Only ELSS investors are qualified for tax benefit under section 80C
Investment amount Determined by the investor and can be modified later Minimum investment amounts are determined by the fund house
Switching of Funds in portfolio Investor can switch funds by paying switching fees. Like from liquid fund to equity fund etc. Investors are not allowed to switch funds as your investment portfolio is managed by professional fund managers.
Charges Higher charges Low management fee
Expenses High Expenses – As there is no upper limit determined by the insurance companies Low Expenses – Upper limits for expenses is pre – set by the regulators
Portfolio disclosure No legal requirement Quarterly disclosures are mandatory
Transparency Lesser transparency Greater Transparency
Maturity Period Normal maturity period is 5 to 20 years No maturity or lock in period except for ELSS
Lock-In Period 5 Years Lock-In Period No Lock-In period except for ELSS i.e 3 years.
Life Cover Yes No Life cover
Premature Redemption You can premature your policy by paying penalty . But if you redeem your investment in ULIP within 3 years of start of paying of premium, you would be at a loss. The administrative charges are quite high during the initial policy years. If investor redeems his units before the lock in period (normally a year in case of non tax saving mutual funds) exit load has to be borne by the investor. Also you are not allowed to redeem your investments in tax saving mutual funds before 3 years.
Post Maturity In ULIP you do not have the option of staying invested post-maturity. You have the option of staying invested in the scheme even after maturity.
Nominee Receivables higher of sum assured or fund value in case of death of insured. (In some policies both). 125% of the single premium paid in case single premium policy. Nominee will receive the fund value.
Track Record Limited track record as ULIPs are comparatively newer in market Longer history or record of performance helps investors choose the right fund.
Risk Exposure Relatively Less Risky Relatively Risky
Return On Investment Potential return on ULIP is low as risk exposure is low and there is a guaranteed sum assured value which will be paid in case of death of the insured irrespective of funds making money or not. Potential return on Mutual funds is higher in hybrid mutual funds where risk exposure is higher.


We should never forget the basic rules which says never mix insurance with investment as both these serves different purposes. The purpose of investment is give protection to the members of the family in case of death of the insured whereas investment helps you build your wealth. So there is no point investing in ULIPs as this product don’t either give the desired insurance cover or higher returns on investment part. But if you are already invested in ULIP then it will be better to take a term insurance plan to have sufficient life cover.

The decision to invest in mutual fund or a ULIP plan should depend on certain factors like the time period of investment, financial goals of the investor and his risk appetite.

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About the Author: Praveen Unnikrishnan


  1. Great comparison.
    As you wrote in the comment, people should stop treating ULIPS as investments. ULIPS are simply life insurance, where you can get some of your insurance fees back. ULIPS build the wealth of your beneficiaries, MF build your own wealth.

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