ULIPs or Mutual Funds: Where to Invest?


Financial planning is all about choosing the right product as per your needs. Unit Linked Insurance Plan (ULIP) and mutual funds are two different products that serve varied purposes; although they have few similar features. Are you confused about whether to invest in a ULIP or a mutual fund? It is crucial to understand what mutual funds and ULIP mean to make an informed choice.

What is a Mutual Fund?

A mutual fund is a pool of funds managed by an asset management company (AMC). The AMC pools funds from various individuals and institutional investors who have a common investment objective. The fund manager invests the funds as per their investment mandate.

For example, you have the option to invest in real estate or an FMCG mutual fund, or a fund that invests in fixed income products like bonds, depending on your investment goal.

What is a ULIP?

Before you decide where to invest, it is essential to understand the meaning of ULIP. Simply put, ULIP combines investment with insurance. You buy a life insurance policy with an investment component.

The insurance company, like the mutual fund, floats a fund to pool money from investors. The company invests a part of the premium that you pay in different assets like stocks or bonds.

Difference between ULIP and Mutual Fund

Let us understand the primary difference between both these investment products before you decide which one to choose.

  • Risk cover

The primary difference between a mutual fund and ULIP is that the latter comes with an in-built insurance plan, while mutual funds offer only investment. With ULIP, you buy risk cover for your family in addition to the investment. Conversely, a mutual fund offers no financial cover to you or your loved ones; you will have to buy a separate insurance plan for their protection. In the event of the demise of the ULIP holder, the nominees receive the sum assured.

  • Tax aspect

As per the Income Tax Act, 1961, your investment in a ULIP is eligible for tax deduction under Section 80C. The amount you invest in ULIPs gets deducted from your taxable income; the upper limit for deduction is Rs. 1.5 lakh annually. Investing in a ULIP reduces your tax liability depending on the tax bracket that you fall.

All mutual funds do not offer tax benefits. If you invest in an Equity Linked Savings Scheme (ELSS), you are eligible for deduction per Section 80C.

On maturity, mutual funds attract long-term capital gains tax (LTCG) for gains above Rs. 1 lakh; the LTCG tax is 10% currently. On the other hand, your maturity proceeds from ULIP are tax-exempt under Section 10(10D) of the Income Tax Act except for those ULIPs whose premium is above Rs. 2.5 lakh per annum.

Where to invest? ULIP or Mutual Fund?

In financial planning, one size does not fit all. Your choice to invest in a mutual fund or ULIP will depend on your needs and objectives.

ULIPs help you in wealth creation with a long-term objective in mind. They can help you plan for long-term financial goals such as retirement planning, saving for your children’s education or other financial goals. The ULIP return calculator is a handy tool to help you decide how much you need to invest in a ULIP for a particular financial objective.

For example, if you wish to save for your child’s education and need funds after 10 years, it can calculate ULIP returns in 10 years to help you plan your investments. If you want to invest for a short term, mutual funds may be a better option.

ULIPs, as we discussed above, offer the added advantage of insurance cover, so you do not have to buy a separate insurance policy when you invest in one.

ULIPs are insurance products. Hence, they have a lock-in period; bear this in mind when you invest in them. Mutual funds except ELSS do not have any lock-in period.

You have the option to switch funds when you invest in a ULIP. You can switch from equity to debt or vice versa or choose balanced funds depending on your risk appetite, financial goals, market conditions and fund performance. You can maximise your ULIP returns in 10 years with the help of these switches. This flexibility, however, is not available in mutual funds.


It is not always an ‘either this or that’ situation when you make an investment choice. Both mutual funds and ULIPs can be a part of your portfolio. The choice will depend on your financial goals. ULIPs offer you insurance benefits as well as help you with tax planning and wealth creation over the long term.