ULIPs vs. mutual funds: Which one to choose?

A wise investment plan can help you build wealth and protect your family’s financial future. Mutual funds and Unit-Linked Insurance Plans (ULIPs) are popular investment options for those seeking long-term wealth creation.

Understanding ULIPs and mutual funds

Comparing investments in mutual funds and ULIPs is like comparing two very different concepts.

A brief overview of the concept of ULIPs and mutual funds

Mutual funds

Here, an asset management company oversees the money of multiple investors through a financial vehicle known as a mutual fund. The fund house invests the monies in various instruments such as stocks, bonds, money market instruments, etc.

Mutual funds are clusters of investments that are managed by professionals, referred to as fund managers. It is comparable to getting on a bus where the driver drives everyone to a specific location. In this case, the bus is a mutual fund program, the fund manager is the driver, and the travelers are the investors. Fund managers are experts in mutual funds who decide on the proper asset allocation based on their extensive knowledge of the financial markets.


ULIPs combine investment and insurance. ULIPs are insurance contracts that allow investors to build wealth while giving them the stability of a life insurance policy.

A portion of the premium for ULIPs provides the investor with life insurance coverage. The remainder is combined and invested in debt, equity, or a combination to contribute to long-term wealth creation.

Comparison of ULIPs vs. mutual funds

ULIPs and mutual funds differ in various ways. Let us discuss some of them.

An analysis of the key differences and similarities between ULIPs and mutual funds

The reason behind the investment

A mutual fund is a sheer investment product with the sole purpose of generating wealth that has the potential to produce respectable returns over time. However, ULIPs benefit from serving as a market-linked investment besides being primarily an insurance product.

Return on investment

ULIP returns can vary because they invest in debt, equity, or both. Depending on the scheme chosen, mutual fund returns can also vary and be low or high. The minimum returns on mutual funds are not guaranteed.

The lock-in period

Because ULIPs are insurance programs, insurers set a lock-in period for these investments that is typically five years. Before the lock-in period expires, investors cannot redeem their investments. Except for Equity Linked Saving Scheme (ELSS) funds, which have a three-year lock-in period, most funds, especially open-ended ones, do not have a lock-in period.


ULIPs offer transparency, thanks to recent regulatory changes made by the Insurance Regulatory and Development Authority of India. The instrument provides details of fund allocation upfront. Mutual fund houses need to provide a comprehensive report of the investments. The information pertains to portfolio holdings, asset allocation, fees charged, active fund manager(s), etc., about various schemes.

Advantages of ULIPs

The flexibility that ULIP provides investors is among the multiple other benefits that it offers.

A discussion of the benefits and opportunities of ULIPs

  • Long-term financial investment: ULIPs offer the best option for customers who want to invest money in a long-term goal.
  • Tax-free income: ULIPs provide tax deductions for premium payments.
  • Encourage goal-based savings: ULIPs encourage methodical investing as they support you in achieving significant financial goals.
  • Offers great flexibility: With ULIPs, investors can switch among investment funds as one‘s needs and goals change. By switching between debt, equities, and cash, they can benefit from changes in stock prices.

Advantages of mutual funds

Not for nothing did mutual funds emerge as a popular investment option for retail investors in India. Let us take a look at some of them.

A discussion of the benefits and opportunities of mutual funds

  • High liquidity on investment: Buying and selling in a  fund scheme is generally simpler unless you choose close-ended mutual funds.
  • Helps in diversifying your portfolio: Investing in funds helps in diversifying your portfolio so that the gains of another can cover the losses from one sector.
  • Quick and convenient process: The process of monitoring funds is easy. In accordance with the investment objectives, the fund manager will choose when, where, and how to deploy the money.
  • Suits one’s personal financial goals: Finding a scheme that suits your earnings, timeframe, investment objectives, and risk tolerance is simple.

How to choose between ULIPs vs. mutual funds

One’s decision to choose between ULIPs and funds depends on several factors, some of which are mentioned below.

A guide to the factors to consider when choosing between ULIPs and mutual funds

Investors should evaluate their needs before investing in any instrument. The best investment choice fits the investor’s financial objectives, risk tolerance, and timeframe for the investment. For example, if investments must be liquid, one may want to consider making investments in mutual funds rather than ULIPs, which typically have a lock-in period of five years at the least. However, not every fund is liquid, and ELSS funds with tax benefits have a three-year lock-in period.

Ideally, you should invest in mutual funds if:

  • You have a short- or medium-term investment horizon.
  • You have a prior-term insurance policy in place.
  • You prefer high liquidity.
  • You have a high or medium tolerance for risk.

When is the ULIP ideal?

  • You seek a long-term investment horizon.
  • You want a life insurance policy included in your investment.
  • You enjoy low to medium levels of risk.
  • You want to reduce your tax liability.


In a nutshell, the prime objective of mutual funds is wealth creation, whereas ULIPs aim to insure the investor’s life. If one is interested in insurance and wealth creation, one may want to consider investing in ULIPs.


Are ULIPs better than mutual funds?

ULIPs and mutual funds serve different purposes. ULIPs offer insurance and investment but may have higher charges. Mutual funds provide greater investment transparency. The choice depends on your financial goals and risk tolerance.

Why not to invest in ULIP?

ULIPs have disadvantages, including high upfront charges, higher premium rates, and complex fee structures that affect returns. Additionally, they often have a lock-in period and limited equity exposure.

What is difference between ULIP and mutual fund?

ULIPs combine insurance and investment, providing life coverage. Mutual funds solely focus on investments, offering potential for higher returns but no insurance. ULIPs may have higher charges.

What is better ULIP or SIP?

ULIP combines insurance and investments, offering life coverage. SIP (Systematic Investment Plan) is a disciplined way to invest in mutual funds. The choice depends on your financial goals and risk tolerance.

Disclaimer: Risk is fundamental to the investment process in Indian stocks. Any discussion of securities in this article should not be considered a recommendation to buy or sell any security. The facts provided are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

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