ULIPs vs Mutual Funds: Which is better?

The investment market is filled with innumerable opportunities and options that can help you create wealth over time. The trick, however, lies in finding the right investment vehicles as per your investment objective. As an investor, your goal should be to invest in products that have the potential to provide higher risk adjusted returns, while helping you save on taxes. Many end up selecting mutual funds for higher returns and ULIPs for tax saving purposes. But if you wish to find out which is better overall – ULIPs or mutual funds, here’s a comparison.

Mutual Fund vs ULIPs – the fundamental difference

A mutual fund is essentially an investment vehicle managed by professional fund managers. They pool together funds from various investors with common investment objectives and invest in various debt and equity funds. Unit-Linked Insurance Plans or ULIPs are insurance policies cum investment vehicles. A portion of the investment is used to invest in equity shares, bonds and debt instruments, (making it a market-linked product). At the same time, the investment also doubles as an insurance policy. That said, a ULIP is not a substitute for a term insurance policy, and you should purchase insurance separately if looking for a higher coverage.

Mutual Fund vs ULIPs – which is better?

If you wish to find out which of the two investment options is better, you should consider the following factors.

Risk Cover

ULIP is an investment cum insurance product which also provides risk cover. In case of the policyholder’s demise, ULIPs compensate the family members with the sum assured amount. Mutual funds on the other hand are regarded as pure investment plans. They do not provide any risk cover in case of the investor’s demise.

The return on investment

Both ULIPs and Mutual Funds provide market-linked returns. However, do remember, that with ULIPs, your entire premium amount isn’t invested in the market; a portion of it goes towards mortality charges (which is what the insurance company retains to provide you with insurance cover). In mutual funds, all your money is invested in the markets. Other things being equal, returns may tend to be higher in mutual funds because your invested amount is higher, but you don’t get life cover. Returns will also depend on the type of fund you choose. ULIPs offer you the facility to switch between funds (with different proportions of equity and debt). With MFs, you will have to decide when you invest which type of fund suits your goals – equity, debt, hybrid, etc. Typically, equity tends to deliver higher returns, debt provides safer but lower returns than equity, while hybrid provides a mix of the two.

Lock-in Period

Since the ULIP is also an insurance product, its lock-in period is 5 years. On the other hand, mutual funds are entirely liquid investment instruments, with no fixed lock-in period except for ELSS funds which come with a 3-year lock-in period. Some mutual funds however do charge an exit fee if you sell before a certain time period. However, it is advisable to invest in both products for a longer period.

Tax implications and benefits

Between the two, ULIPs offer better tax benefits. ULIPs are an EEE (exempt, exempt, exempt) investment. Which means your initial investment is tax deductible (under Section 80C of the IT Act), the returns you earn are exempt from tax and the maturity amount is also exempt. In the case of mutual funds, ELSS investments are covered under 80C and investments up to Rs. 150,000 are deductible. However, LTCG is payable at 10% for returns exceeding Rs. 100,000 in a financial year. The taxation on ULIPs has also changed from 1^st Feb 2021. As per the new provision, if the annual premium of your new ULIP investment is more than Rs 2.5 lakh the return that you will get will no longer be tax exempt.As is apparent, there are several differences between ULIPs and Mutual Funds. As such, you should consider what suits your investment needs best and then invest.

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Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. .  I-Sec acts as a Composite Corporate agent having registration number –CA0113, AMFI Regn. No.: ARN-0845.Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Insurance is the subject matter of solicitation. ICICI Securities Ltd. does not underwrite the risk or act as an insurer.  The non-broking products / services like Mutual Funds, Insurance etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.