ULIPs vs Mutual funds: Which one should you choose?

Created on 17 Feb 2021

Wraps up in 4 Min

Read by 2.1k people

Updated on 16 May 2022

Marvel vs DC, Shahrukh vs Salman, Vanilla vs Chocolate. 
Certain debates are always unsolvable. One such debate which might occur for an investor is whether to invest in ULIP or Mutual funds. Choosing the right one could determine how fast you’d reach your goals and how your portfolio is structured. And hence, you will have to take into consideration things like risk profile, age, goals and objectives, etc. 

In this blog, we help you in arriving at the right decision and ultimately help you towards the construction of a strong portfolio. But before we start with the comparison, we must know what these terms are.

ULIP or Unit Linked Insurance Plans 

ULIP or Unit Linked Insurance plans might be the most suitable option for those who are looking for a 2-in-1 combo. This not only acts as an investment avenue but also offers a chance to subscribe for insurance alongside the same premium. 

This means that when you invest your money into these funds, a part of your money will be put into shares, bonds, etc., and the other half will be used in offering you insurance. Hence, you will be able to fulfil both your financial goals and insurance goals at the same time. 

The fund manager will take care of all the performance-related matters, and hence you are relieved from all the hassle of constantly following and keeping track of its movements.

Advantages of ULIP 

Your investment into Unit-linked Insurance plans carries several benefits, and some of them are listed below:

  • Most investors choose their investment based on the income tax benefits derived. If you are one such person, then ULIPs can be a good option for you as they are eligible for deductions under 80C. Furthermore, the returns are also applicable for a deduction under 10(10D). 
  • Further, if you think of switching your investment from a debt-based one to an equity-based investment, you would be completely free to do so. However, you might incur certain charges, and when you come to the insurance part, the same may not be possible. 

That looks like an ideal option, right? So what’s the problem? 

Disadvantages of ULIP

Just like any other investment option, a ULIP has its own set of drawbacks and disadvantages. 

As per IRDAI or the Insurance Regulatory and Development Authority of India, an investor will have to keep his amount invested for 3-5 years, depending on different ULIPs. This mandatory lock-in period can be a problem, especially when you are in immediate need of liquidity.

There are a variety of charges associated with your investment into a ULIP. Some of those include fund management charges, switching of funds charges, etc. These charges might largely affect your return.


Mutual Funds 

Mutual funds are like an easy guidebook to crack exams. So, no matter if you are a newbie or an expert, anyone can use it to fulfil their financial goals. Here money is collected from various investors holding the same financial goal and the pool of money thus gathered is then invested into different securities. The fund manager, just like in the case of a ULIP, will be responsible for managing and tracking your fund. 

Advantages of Mutual Funds 

Some of the pros of investing in a mutual fund are as follows:

  • Most mutual funds, to offset the risk, ensure that the portfolio is diversified. And thus, even if there are huge plunges in the market, your portfolio might have a relatively safer landing. 
  • Any investment of up to 1.5 lakhs per year is exempted from payment of taxes. 
  • SIP and SWP are some added benefits when you go in for a mutual fund. Hence, you can both invest or withdraw in smaller amounts without having to go in for bulk. 
  • You will have an expert taking care of all your funds, and thus, you are relieved of the task of constantly monitoring the funds and tracking their performance. 

Disadvantages of Mutual Funds 

Certain disadvantages of mutual funds are listed below:

  • As said earlier, a fund manager will be managing your funds on your behalf. So you will be paying a fee for the services offered. Apart from that, you will also be paying other fees. 
  • Certain mutual funds can be extremely risky. For instance, say you invested in a thematic or sector-based fund. If the market acts against your will, then you will be losing heftily. 
  • When compared to other equity-based investments, mutual funds might not have a very attractive return as such. 

Mutual funds vs ULIP 

Both the investment avenues differ from each other in several ways. The variations in each of them are listed below:


Mutual funds


Expenses  incurred

In mutual funds, you can get expert management of funds and maintenance at a relatively lower rate. The highest limit for expense ratio is 1.05%. 

ULIPs might invite a much higher cost when compared to mutual funds. Switching between funds after a certain threshold might invite a charge of 100 to 500. Along with that, they charge a maximum of 1.35% as fund management charges. 

Lock-in period 

Mutual funds rarely carry along a  lock-in-period.

You will have to keep your funds locked in for a minimum of 5 years in ULIPs. 

Investment type

It is purely aimed at offering an investment avenue. 

It offers both investment and insurance-based portfolios. 

Tax benefits 

Mutual funds offer a tax deduction only against an investment in ELSS.

Investing in any other scheme would not provide tax deductions and are subject to taxation as per the applicable tax bracket.

Investment in ULIP is eligible for income tax deduction under section 80C. 


Higher liquidity

Comparatively lower liquidity when compared to mutual funds.

To Sum Up 

Mutual Funds might seem like a pretty safer, considering the drawbacks of a ULIP. Further, a person possessing enormous knowledge about the markets may perform better with these funds rather than an inexperienced one. 

Irrespective of what we say, it all boils down to what you want from your investment, goals and requirement. So start analyzing and find the best investment option for you. 

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An Article By -

Rishika Mukherjee

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Mukherjee is an avid reader and loves to write as much as read. She is the youngest of all but handles chores like a 50-year-old woman. She takes a lot on her plate and somehow, eerily manages to get the job done. As Hazel Grace stated, she could read a good author's grocery list, and so would Miss Mukherjee. 

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