ULIP vs Mutual Funds: Difference, Risk, Cost, Returns, Coverage, Tax Benefits, Lock In Period

Manish Kothari
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Manish Kothari

What is ULIP?

A Unit Linked Insurance Plan (ULIP) is a form of life insurance plan that is multifaceted in nature and presents an opportunity for insurance coverage as well as investment. Unit Trust of India (UTI) originally presented ULIP in our country in 1971. The insurance firm spends a part of the premium amount when investing in ULIP in various forms of financial instruments, such as equities, debt, money market instruments, etc.

What is a Mutual Fund?

A Mutual Fund is a fund that is made up of a pool of money collected from investors to invest in various instruments. The fund house then invests this collected amount in the capital market in different investing options such as equities, debt, and other securities. The returns derived from investments in the mutual fund are shared among the investors on a proportional basis.

Differences between ULIP and Mutual Fund

  1. Product Type

ULIP is an insurance plan that, by investing in shares, bonds, or other money market products, offers life protection and also produces returns. On the other side, mutual funds are pure investing vehicles with the primary goal of producing returns. There is, however, no consideration of coverage for life.

2. Risk Cover

ULIPs compensate family members for the sum of money guaranteed in the case of the policyholder's death. However, in the scenario of a mutual fund, the money of the mutual fund is passed to just the nominee. Mutual funds are pure investing funds that have no insurance coverage.

3. Investment Return

The returns from ULIP are substantially lower. The justification is that, whether the investment scheme makes money or not, ULIPs guarantee a fixed sum in case of mortality. The returns from mutual funds, in contrast, vary according to the risk parameters of the category selected. There is a potential for equity mutual funds to deliver higher returns, while debt mutual funds deliver marginally lower returns.

4. Lock-in Period

ULIP being an insurance plan, insurance firms generally establish the lock-in term on such an investment before which the investment can not be reversed. Depending on the type and function of the investment scheme, ULIPs have a lock-in duration that ranges from three to five years. In general, mutual funds have no lock-in period and are considered one of the most liquid forms of investments. Only in schemes such as ELSS, which is a tax saving scheme, is there a lock-in period of 3 years. Even this is the lowest lock-in option amongst all tax saving options available.

5. Transparency

ULIPs are very advanced plans that offer a mixture of risk cover and investment. These have a less straightforward framework for the underlying costs and distribution of funds. Due to this lack of transparency, ULIPs are not a preferred mode of investment. On the other hand, the premiums paid and the shareholding in the portfolio of mutual funds are available on the websites of the asset management companies and the regulator AMFI.

6. Taxation benefits

Investment in ULIPs are valid under Section 80C of the Income Tax Act, 1961, for income tax deduction, i.e. you may claim tax deductions on the investment in ULIPs of up to Rs.1.5 lakh a year. Mutual funds normally do not permit any income tax deduction. However, investments in equity-linked savings schemes (ELSS) are valid for deduction up to Rs. 1.5 lakhs in a financial year.

7. Expenditure

Compared to ULIPs, the money paid and portfolio allocations are relatively transparent for mutual funds. Mutual funds have a very transparent cost, also known as the expense ratio. This expense ratio varies from 0.1% to 2.5%, depending on the category and fund house. In the case of ULIPs, though, they are much higher than mutual funds and could be as high as 5% or more in the initial few years.

ParameterULIPsMutual Funds
Product TypeAlong with investment opportunities, it provides life insurance.It just gives investment opportunities.
Risk CoverULIPs present a within-built investment feature that provides the insured amount in the circumstance of the policyholder 's death.Mutual funds do not provide a risk cover. However, they do offer a substantially higher return than ULIPs.
Investment ReturnThe returns are very low when investing in long-term ULIPs as the expenses and premiums towards life cover are high.Investing in equity mutual funds for the long term can deliver high returns, while debt mutual funds will deliver low to moderate returns with lower risk.
Lock-in TermFive Year MinimumNo span of lock-in for regular mutual funds. Lock-in span of three years for tax-saving ELSS schemes
TransparencyLess transparent because of the distribution of assets and hidden costs.Highly transparent on fees and management of the portfolio.
Taxation BenefitUnder Section 80C of the Income Tax Act, one can claim tax deductions up to Rs 1.50 lakh.Investments in ELSS are available for tax deduction.
ExpenditureDue to the complex design of the portfolio, ULIPs have increased expenses.Due to supervision through professional fund managers, mutual funds have low expenses.

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