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ULIP vs Mutual Fund is one of the most common questions for the investors. Let us see the difference between ULIP vs Mutual fund. We come across quite a few queries regarding the difference between ULIP and mutual fund comparison for generating returns and meeting your goals. Choosing between ULIPs and Mutual Funds can be critical depending on your goals. The nature of both products is vastly different and they serve different purposes altogether. Let’s find out the distinction between ULIP VS Mutual Fund.

What is a Mutual Fund?

A mutual fund is one of the best investment options and easily available to anybody.

Mutual funds are suitable when

  • Your primary goal is to earn returns from your surplus money
  • Already have a term insurance plan 
  • Have an understanding of the risk associated with different asset classes
  • Mutual funds are available for both short and  long-term investment horizon as well as periods in between

In mutual funds, there are two ways to invest, either by paying a single lump sum amount or through the SIP. You can check out the difference between SIP and mutual fund. To know about the best SIP mutual funds to invest in, click here.

What are Unit Linked Insurance Plans (ULIP)?

Unit-Linked Insurance Plans (ULIP) are insurance policies that offer investors an insurance cover along with a way to invest. They differentiate themselves from other normal insurance policies by offering greater returns by investing in various asset classes.

While it might seem like a better proposition, however, it has its flaws.

This brings us to the difference between investment goals and insurance goals. The primary purpose of insurance should be met with an insurance product and not from an investment product.

ULIPs is a scheme presented by insurance companies, in a similar manner to what a mutual fund does.

Investment and insurance are different objectives. It’s better to keep them separated. For investment purpose, invest in best investment plans like mutual funds. or for insurance purpose buy a pure insurance plan rather than an insurance cum investment plan.

ULIP vs Mutual Fund: Key Differences

One of the most common investment options for a retirement fund is a ULIP. Mutual funds are also popular, but they have some major differences from the features of a ULIP. Following are the key differences between ULIP and Mutual Fund:

Basis of DifferenceULIPMutual Fund
PurposeInsurance Cover + Investment BenefitsInvestment Benefits
Investment DurationLong TermShort to Long Term
LiquidityNot very liquidHighly liquid
ReturnsNot fixed, as it invests in equityMarket linked
Tax BenefitInvestment amount qualifies for tax exemption under Section 80C. Maturity amount is also tax-free under Section 10 (10D).Only for ELSS scheme
Lock in PeriodMinimum 5 yearsNo lock in period (except for ELSS funds – 3 years lock in)
Switching OptionCan switch between funds linked to the plan.No switching option
Fund Management Charges1.35%2.50%
Risk CoverIn case of untimely death of the policy holder, nominees are compensated for the sum insured.Investments are transferred to the nominee, in case of untimely demise of the investor.
Regulatory BodyIRDASEBI

ULIP vs Mutual Fund: In Detail

Return on investment

ULIPs are a less risky investment option for those who want to invest in the stock market. The risk is lower than equity mutual funds and so are the returns.

Lock-in Period

ULIP is an insurance product and they have lock-in periods. The lock-in duration is defined by the insurance companies. It may range from three to five years depending on the investment scheme. You cannot redeem the investment before this period. Mutual funds generally have a shorter lock-in period, which may be approximately one year. But even mutual funds have varying nature and structure such as the ELSS (Equity Linked Savings Schemes). The lock-in duration of such schemes may last up to 3 years.


ULIPs are complex investment products that combine risk management and portfolio allocation but their structure is not transparent. Mutual funds offer more transparency about the fees they charge as well as where your money is invested.

Taxation Benefits

. Your ULIP investment of up to Rs. 1.5 lakh in a year is eligible for Income Tax deduction under Section 80C of the Income Tax Act, 1961. While mutual funds offer only one-time exemptions from taxes when investing in ELSS schemes. Taxes are applicable on all other mutual fund investments according to the tax bracket. 


Mutual funds offer the benefit of low investment costs and professional investment management. The Securities Exchange Board of India (SEBI) has capped the expense ratio on mutual funds. It is known as Total Expense Ratio (TER),  which can be up to 1.25%. While there is no such limit prescribed by SEBI for ULIPs. As a result, charges of these schemes can go much higher than in Mutual Funds.

Risk Cover

ULIPs come with an in-built insurance plan. It offers the sum assured to the family in case the ULIP holder dies within his term. However, in mutual funds, there is no risk cover through insurance. 

Mutual funds can be suitable when:

  1. You have a short, medium, or long term investment horizon.
  2. Already have a term life assurance plan set up.
  3. Want high liquidity on your investments 
  4. Have a medium to high-risk appetite.

Read also about the LIC vs Mutual Fund

ULIP vs Mutual Fund – Which is a Better Investment Option for You?

ULIP is a better investment product for those who want both – an insurance policy and the potential to grow their savings. Mutual funds offer you no such guarantees, but they do provide more flexibility when it comes to what percentage of your money gets invested in specific sectors.

ULIP has a lock-in period of five years. Mutual funds can be withdrawn at any time except in the case of ELSS.

ULIPs give you the benefit of being able to switch between funds without having to pay any taxes. Mutual Funds allow you to switch between schemes of a fund house. The switching is considered a redemption and it will be taxable and apply capital gains tax.

Some chargeable features of ULIPs are mortality charges, premium allocation charges, fund management rates, and administration fees. However, the entry load is not applicable on mutual funds. But you may have to pay annual fund management fees. Mutual funds may also charge an exit load depending on the product.

You would also like to check difference between mutual funds and stocks

Frequently Asked Questions

Should I invest in ULIPs or mutual funds?

The choice between ULIP and a mutual fund largely depends on your investment goals and objectives, financial obligations and risk tolerance levels. ULIP is an insurance cum investment scheme. While mutual funds are pure wealth-creation tools.

Can ULIPs give high returns?

The returns from ULIPs are market linked. Thus, returns depend on the fund’s performance and the market performance.

Is ULIP a mutual fund?

No. ULIP is an investment cum insurance scheme that invests across financial instruments.