4 factors that help ULIPs beat mutual funds



We all agree that life is unpredictable, and all of us are put to the test at every stage of life. During such times, we are caught off guard and are unprepared to deal with an unannounced emergency. A contingency can arise in the form of medical emergencies or any other issue, which can exhaust our hard-earned savings. To help you combat with any emergency, investment products like mutual funds and a Unit Linked Insurance Plan (ULIP) are available in the market. However, since both these products offer a host of benefits, it is difficult to make a selection between the two.

Before purchasing either of the two investment products, let’s begin by understanding the difference between the two, which are mutual funds and a ULIP respectively:

Mutual Fund is an investment product A ULIP Plan is a combination of investment and insurance
While regular mutual funds do not have a lock-in period, tax-saving mutual funds have a lock-in period of three years Under a ULIP Policy, the lock-in period is of five years
Only Equity Linked Savings Scheme (ELSS) products provide you with tax benefits ULIP investment is eligible for a tax deduction under the Income Tax Act, 1961
A mutual fund investment offers transparency in terms of the charged fees and portfolio holdings A ULIP Policy provides transparency for underlying expenses as well as asset allocation


The difference between these products issignificant. Therefore, you should select an investment product based on your requirement. Many people generally choose to opt for ULIP insurance over mutual funds due to its dual benefits of life insurance and investment opportunities in market-linked funds. There are a few other factors that can help you distinguish between the two: 


  • Life coverage


Unlike mutual funds, a ULIP policy offers a life insurance coverage, which is approximately 10 times the premium. For instance, if you’re paying a premium of Rs. 1 Lakh, the overall coverage will be of Rs. 10 Lakhs. Apart from that, a ULIP policy also has a single premium option. However, the sum assured will be 1.25 times of the one-time premium, which is being paid.


  • Premium


When you invest in mutual funds, it does not offer you any minimum tenure for paying premiums as compared to ULIPs. Under a ULIP Policy, the premium paying term is generally for a minimum period of five years. As a policyholder, you should compulsorily pay the premium during the lock-in period of five years. In case you miss the premium payment, the amount will go towards the discontinuation fund and will be paid to you only after the completion of five years. 


  • Taxation


Whether it is a mutual fund or a ULIP Plan, both these products have an equity-based investment option. While switching from a debt mutual fund to an equity fund attracts either short-term or long-term taxation, switching between debt and equity schemes of ULIP policy is not taxed. Moreover, in the case of ULIPs, the maturity proceeds are tax-free as per Section 10(10D) of the Income Tax Act, 1961.  


  • Charges


A mutual fund has only one applicable charge, which is capped by the Securities and Exchange Board of India depending on the size of the fund. Unlike mutual funds, a ULIP Policy has the following most common four charges:

  1. Premium allocation charge
  2. Policy administration charge
  3. Fund management charge
  4. Mortality charge


As highlighted above, both ULIPs and Mutual Funds have their own set of benefits. However, what makes ULIPs better is the fact that it provides you with investment and insurance in a single product which also further helps you in realising your Life Goals. The primary reason why ULIPs beat mutual funds is because of the provision of life coverage. In addition to this, it is a flexible option of investment, which offers different funds along with a switching option, allowing you to enhance your ULIP returns. Moreover, you can achieve your life goals since a ULIP policy is a long-term investment.