Difference between ULIP and Mutual Funds

When it comes to making a significant investment, people often get confused between different options. One of the key areas of confusion is choosing between ULIPs and mutual funds. If you too are unaware of which one to pick out of the two, learn that it would be better if you made a choice after understanding the differences between the two. Let us first understand what ULIP and mutual funds really mean.

What is ULIP?

Unit-Linked Insurance Plans or ULIP are insurance policies that offer both insurance and investment. The key aspect that makes ULIPs different from different insurance policy types is that ULIPs provide greater returns by investing in various asset classes.

What are Mutual Funds?

A mutual fund is an open-end professionally managed investment fund that brings money together from many people and invests it in bonds, stocks and other assets.

Difference Between ULIP & Mutual Funds 

The key differences between ULIP and mutual funds based on their features include:

• Type of Product - While ULIP provides life cover and also generates returns, mutual funds are pure investment products that focus only on generating returns. 
• Tax Saving Aspect - In ULIPs, the premium paid up to Rs.1.5 Lakh helps in saving tax under Section 80C of the Income Tax Act. In case of a claim, the sum assured paid to the nominee is also tax-free under section 10(10D) of the Income Tax Act. In case of ELSS (Equity-Linked Saving Scheme) mutual funds, one can save tax under Section 80C up to a limit of Rs. 1.5 Lakh.
• Liquidity - ULIPs come with an initial lock-in period of 5 years, while mutual fund schemes are completely liquid and come with the freedom to enter and exit as per one's investment plans.
• Risk Cover - ULIPs compensate family members with the amount of sum assured in case of death of the policyholder, but in case of mutual funds, the investment is transferred to the nominee. 
• Expenses - While mutual funds have lower expenses, up to 2.5%, ULIPs have expenses higher than mutual funds.
• When to Buy - One should buy mutual funds when they have multiple goals, short term and long term. While one should buy ULIPs when they want investment as well as insurance. 

ULIP or Mutual Fund – Which Is the Best for You?

Since both ULIPs and mutual funds serve different purposes altogether, it is advisable not to choose any in haste. One must have complete clarity about what they would want from their money to achieve. In case you are unclear about making a choice between ULIPs and mutual funds, ask yourself some questions like 'What are your financial goals?', 'What is your investment horizon?', and 'Do you need a life cover?'. Once you get the answers, invest in the right product right away! 

If still having any doubts over your ideal choice, make sure you talk to one of the experts from the InsuranceDekho team. 

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.