ULIPs vs Mutual Funds - Meaning, Differences & Benefits

A mutual fund is a pool of funds collected from various investors and utilized towards investing in a variety of securities chosen as per a pre-decided investment goal.

Difference Between ULIPs vs Mutual Funds

Given below are some key differences between ULIPs and Mutual Funds:

Objective of Investing

Objective of Investing in ULIPs

Unit Linked Insurance Plans are ideal for long-term investing as they offer twin benefits of investing and insurance protection.

Objective of Investing in Mutual Funds

Mutual funds are of various types and each type of mutual fund carries a distinct investment goal. Mutual funds are suited for short to medium-term investment goals.

Fund Switching Options

Fund Switching Options in ULIPs

With Unit Linked Insurance Plans (ULIPs), investors can switch between the funds which are linked to the plan. As a result, investors can choose to alter the risk return on their plan as per their choice.

Fund Switching Options in Mutual Funds

Mutual funds do not allow investors to switch from one fund to another. In case you are not happy with the performance of a certain fund which you've invested in, you have the option of exiting the fund completely. This can be done by paying exit charges, if applicable.

Liquidity

Liquidity in ULIPs

Unit Linked Insurance Plans offer limited liquidity as compared to other types of investments. In order to encash the invested units, investors must continue their investment for a minimum period of time.

Liquidity in Mutual Funds

Mutual funds offer easy liquidity wherein investors can easily sell their shares and receive the funds in a short period of time, usually within 1 or 2 business days. This is not applicable for ELSS and funds which have a specified minimum lock-in period.

Associated Charges

Associated Charges in ULIPs

Unit Linked Insurance Plans levy Mortality charges towards the life insurance cover which it provides. Alongside to Mortality charges, ULIPs may also levy other charges like Administration charges, premium allocation charge and fund management charges.

Associated Charges in Mutual Funds

Charges applicable as part of mutual fund investments include annual fund management charges, entry load and exit load charges.

Ease of Investment

Ease of Investment in ULIPs

In comparison, ULIPs are more structured than mutual funds. For a ULIP investment, your income and financial goals will be assessed by an insurance advisor, who will then formulate an investment plan crafted to your needs.

As a part of the investment, you will be required to pay a fixed amount as premium for a minimum duration of 5 years. If you wish to exit the ULIP before the completion of the minimum investment period, you may do so but at the cost of certain capital losses or stand to lose a part of your premium.

Ease of Investment in Mutual FundsMutual funds offer much better flexibility to investors in terms of investing. A mutual fund investment is one of the easiest to do as it can be started with the minimum of capital for a short term, as low as 12 months.

Known as SIP or systematic investment plan, they are extremely affordable and offer a great channel to consolidate savings. Also, unlike ULIPs, investors can easily withdraw from an SIP without having to pay any penalty or charges.

Portfolio Disclosure

Portfolio Disclosure in ULIPs

As proof of transparency of investments, Unit Linked Insurance Plans are required to reveal their portfolios every quarter. Some ULIPs also disclose their portfolios on a monthly basis.

Portfolio Disclosure in Mutual FundsAs per SEBI guidelines, mutual funds are required to make their portfolios available to investors on a quarterly basis. Some mutual funds do this on a monthly basis . This is done so that investors can not only have knowledge about the portfolio but also get to evaluate whether or not the money invested is yielding returns for them.

Asset Allocation Flexibility

Asset Allocation Flexibility in ULIPs

With regard to migrating across asset allocation plans, ULIPS offer greater freedom. Investors are allowed a specified number of free switches in a year. In case they exceed the number of free switches, the insurer may levy a nominal fee for every switch beyond the free limit.

Asset Allocation Flexibility in Mutual Funds

When compared to ULIPs, mutual funds offer lesser flexibility with regards to migration across plans. This flexibility can be especially helpful for experienced investors who wish to switch from equity funds to debt funds when the market is at its peak or wish to switch from debt funds to equity funds when the market is not performing.

Also, if an investor wishes to migrate to another mutual fund under the existing fund umbrella, they will only be permitted to do so at a cost, usually with regards to the entry load or exit load.

Tax Benefits

Tax Benefits in ULIPs

As per the regulations of Section 80C of the Income Tax Act, premiums paid up to the amount of Rs 1,00,000 towards ULIP investments will be eligible for deduction from the income. Similarly, as per Section 10(10D), proceeds earned from ULIP investments are also tax free.

Tax Benefits in Mutual Funds

Only those investments which have been done in tax saving funds will be eligible for tax benefits under Section 80C.

Comparison between  Mutual Funds and ULIPs

Disclaimer

Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.

GST rate of 18% applicable for all financial services effective July 1, 2017.