Know the Difference Between ULIP vs Mutual Funds and Which is Better Investment Option

In this Samco Investor Education Series, we will cover the topic of (Unit Linked Insurance Plan) ULIP vs Mutual Funds. Investors often find it confusing to choose between ULIP  vs Mutual funds. 

ULIP supporters have always projected ULIPs as a better way of managing risk and investment whereas Mutual Fund proponents have said that the returns generated by Mutual Funds are way more superior to ULIPs.

In this article, we will cover,
  • What are ULIP & Mutual Funds?
  • Difference between ULIP vs Mutual Fund
  • Myths associated with ULIPs and Mutual Funds
  • Which is better ULIP or Mutual Fund?
  • Strategies for Investment & Risk Mitigation
  vlip vs mutual funds

Mutual Funds were first introduced in 1963 by the Government of India in collaboration with RBI. Since then the Indian mutual fund market has seen tremendous growth and change. The UTI formation attracted investors to take their first step towards the mutual fund. To further improve the mutual funds' markets, UTI had introduced ULIP and started ULIP culture in the country.

Let’s talk in detail about ULIP & Mutual Funds


ULIP, short for Unit Linked Insurance Plan, was first introduced by UTI in 1971. LIC had introduced the second ULIP in 1989 in the country when only PSUs were allowed to create Mutual Funds. It is a mix of insurance along with investment. Like any other life insurance product, these offer life cover along with investment. A portion of your investment goes towards life insurance and rest into a fund that is based on equity or debt or both and matches with your long-term goals. Though, these policies can be more profitable than a traditional insurance policy; it also has a higher risk.

Salient Features of ULIP
  1. Aims to attract masses who are away from the stock market. By linking Insurance and Investment the Govt. of India tried to ease the fear among investors
  2. ULIP is insurance cum investment products meaning ULIP has the benefit of both Insurance and Investment
  3. ULIP gives Income Tax Benefit to plan holders under section 80C of IT act, 1961
  4. Investment amount doesn’t bear service tax and it only entails mortality charges

Mutual Funds:

Mutual Fund is basically an investment corpus generated by pooling money from the retail investor as well as institutional investors. The proportion of retail investor & institutional investors could vary depending on the nature of the fund.

Watch this video to understand what are mutual funds:
Salient features of Mutual Funds

For brevity purposes, we will use the term “MF” to refer “Mutual Funds” in this article.

  1. Aims at portfolio diversification and thereby reducing the associated risk with stock markets.
  2. Have low cost compared to ULIPs, for example- hefty commission of agents is not applicable to MFs.
  3. Depending on the nature of the fund, investors may or may not get the Income Tax benefit.

Difference between ULIP vs Mutual Funds:

Basis  ULIPs  MFs 
Definition A ULIP is an insurance cum investment plan where policyholders get both Insurance Cover Plus Investment Returns. A Mutual Fund is a professionally managed investment fund that pools money from many investors to purchase securities. It doesn’t offer any Insurance Cover.
Investment Instruments Capital is generally invested in equity, debt and hybrid funds. Corpus is usually invested in equity, debt & other money market investment vehicles as per investment objective of the fund.
Liquidity There is a lock-in period of 5 years, after which policyholders can withdraw the money. Most of the MFs don’t have a lock-in period therefore investors can liquidate the investment whenever they want  provided it’s an open-ended fund or ETFs.
Tax Benefits ULIP holders get tax benefits under section 80C of IT Act, 1961. Depending on the type of fund, holders may or may not get the benefit.
Cost Involved There are many charges which needs to borne by the policyholder like Policy admin charges, Premium allocation charges, etc. Unlike ULIPs, there are few costs involved with the fund like exit load and fund management charges.
Risk Factors There is a risk factor involved with it. Mutual Funds also possess risk with them.
Loyalty benefits Policyholders get some sort of loyalty benefits on long term basis. There is no loyalty benefit with Mutual Funds.

Which is better ULIPs or Mutual Funds?

Well, both ULIPs and Mutual Funds have their own benefits. ULIPs offer risk mitigation plus investment returns whereas mutual funds offer a better return on investment. Data suggests that Mutual funds offer better returns than ULIPs. You can refer the table below to understand the returns generated by both the instruments.

Fund category HDFC ULIPs HDFC Mutual Funds
Fund Name 3-year return 5-year return Fund Name   3-year return 5-year return
Large Cap Large Cap Fund 7.48 12.44 HDFC Top 200 Fund 10.15 15.82
Multi cap Diversified Equity Fund 14.04 N/A HDFC Capital Builder Fund 14.21 20.73
Mid cap Opportunities Fund 16.31 19.82 HDFC Mid-cap Opportunities Fund 16.35 25.82
Fund category ICICI ULIPs ICICI Prudential Mutual Funds
Fund Name 3-year return 5-year return Fund Name   3-year return 5-year return
Large Cap Bluechip Fund 8.81 13.83 ICICI Prudential Focused Bluechip Equity Fund 11.18 17.34
Multi cap Multi Cap Growth Fund 11.59 17.01 ICICI Prudential Multicap Fund 12.16 18.48
Mid cap Not Available -- -- ICICI Prudential Midcap Fund 13.18 25.31
Fund category TATA AIA ULIPs Tata Mutual Fund
Fund Name 3-year return 5-year return Fund Name   3-year return 5-year return
Large Cap Large Cap Equity Fund 8.80 15.03 Tata Large Cap Fund 9.43 15.06
Multi cap Equity Fund 8.31 13.70 Tata Equity P/E Fund 16.40 23.05
Mid cap Whole Life Mid Cap Equity Fund 16.77% 25.91 Tata Midcap Growth Fund 13.27 24.84

Information as on January 31, 2018. Source: PaisaBazaar

Strategies for Investment & Risk:  

We need to understand that risk mitigation and returns both are important aspects of average Indian lives. If we look out for the risk coverage by ULIPs then we will find that the amount offered for the risk coverage is less, somewhere in between 5 lakh rupees to 10 lakh rupees approximately. We need to understand that 5 lac or 10 lac rupees are a way to less to sustain a family after the policyholder dies and that too the whole family, which might be having spouse and children. Therefore, instead of taking ULIP, you can look out for a term life which provides a cover in X million rupees against a reasonable premium amount and later you can separately invest in good mutual funds. A typical Life term cost around 12000 annual with a coverage of 25 lakh rupees with a claim settlement ratio at 97%. The coverage can be increased to 50 Lakh, 1 Crore or even more depending on the income and overall health of the policyholder. So based on your requirement you can opt for the best term life.

You can refer the following strategy for better risk coverage & investment returns.

First, decide the amount you can spend on insurance and investment. Let’s say you’re earning 50,000 per month. If there is a saving of 20% after all expenses then the saved amount will be 120,000 annually. So first decide how much money you would like to save for any year.

One can split the saved money into three groups. Safe Investment (60-75%), Risky Investment for better returns (30-10%) & Risk mitigation through insurance (10-15%). First one should buy a term life plan, they should invest in relatively safer instruments for stable long-term returns such as debt mutual funds, bonds and FDs' and remaining amount should be used for market investments this could include direct investment in equities and equity oriented mutual funds.

One should always understand that at first ULIPs may look attractive in the sense that it offers both risk coverage and investment return. But neither return nor risk coverage is sufficient for individuals. It’s better than individuals buy both the products separately for better results and outcomes.

That covers an in-depth comparison of ULIP vs Mutual Funds. For more useful articles on mutual funds, trading, investing and market knowledge, visit our Investor Education section.

(Note: This content is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks or mutual funds, please conduct proper due diligence).

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