ULIP vs Mutual Fund: Which one to choose?

Both ULIP and Mutual Funds are considered good investment vehicles, however, there exists a significant difference between the two. Read on to know the difference to make an informed decision.

People use different financial instruments based on their requirements, age, risk-taking capabilities, and level of awareness to achieve their financial goals. Both ULIP (Unit Linked Insurance Plans) and Mutual Funds are one of many profitable investment instruments that help you efficiently. However, there exist some advantages and disadvantages to both financial instruments.

Let’s understand which investment schemes help individual investors to achieve their financial goals.

What is ULIP (Unit Linked Insurance Plans)?

ULIP (Unit Linked Insurance Plans) is an insurance plan that offers dual benefits of investment and life cover. It allows investors to fulfill their long-term goals by accumulating wealth and offers a life cover to protect your loved ones in case of an unfortunate event. One part of the investment in ULIP is considered an insurance premium and another is invested in debt and equity to reap financial benefits. 

Different schemes under ULIP

Below table will help you know the broad classification of ULIPs based on various criteria.

Based On The Type Of Funds Based On Wealth Creation Based On The Plan Structure
  • Equity Fund
  • Debt Fund
  • Balanced Fund
  • Liquid Fund
  • Cash Fund
  • Single Premium and Regular Premium ULIPs
  • Life-staged ULIPs
  • Guaranteed and Non-Guaranteed ULIPs
  • Regular v/s Single Premium ULIPs
  • Guaranteed v/s Non-guaranteed ULIPs


What is a Mutual Fund?

A mutual fund is a financial instrument that pools money from various investors which are then invested in different securities such as bonds, stocks, money market instruments, etc. You can invest in mutual funds through the SIP (Systematic Investment Plan) method or the lump sum method depending on your financial plans.

Below are the different types of mutual funds based on asset class, investment goal, maturity period, and risk.

Based on Asset Class Based on the Investment Goal Based on the Maturity Period Based on Risk


  • Equity Funds
  • Debt Funds
  • Money Market Funds
  • Hybrid Funds
  • Growth / Equity-Oriented Scheme
  • Income / Debt-Oriented Scheme
  • Money market or Liquid funds
  • Tax-Saving Funds (ELSS)
  • Capital Protection Funds
  • Fixed Maturity Funds
  • Pension Funds
  • Gilt fund
  • Index fund
  • Open-Ended Funds
  • Closed-Ended Funds
  • Interval Funds
  • Very Low-Risk Funds
  • Low-Risk Funds
  • Medium-risk Funds
  • High-Risk Funds

Difference between ULIP and mutual fund 

Now that you have understood the basic concept of ULIP and mutual fund, it’s time to understand the difference between the two. Before we go on to the differentiation table, Let’s understand how ULIP and mutual funds differ from one another with an example.

Mr. X and Mr. Y invest ₹40000 every month in Unit Linked Insurance Plans and Mutual funds, respectively. A part of Mr. X’s investment of ₹40000 is considered an ‘insurance premium,’ and the remaining part goes towards another financial instrument. With this premium, he gets insurance coverage of ₹4 lakhs in case of an unfortunate event. This way, Mr. X enjoys the benefit of both wealth creation and insurance coverage. On the other hand, Mr. Y can enjoy the benefits of investing in securities; however, he has to buy an additional insurance policy for life cover.

Hope the above example has helped you understand the concept of ULIP and mutual funds. Now, read the below table to learn the difference between the two.


  Unit Linked Insurance Plans Mutual Fund
Objective Wealth creation and insurance coverage Wealth creation
Policy Term Long-term Short-term, medium-term, and long-term – can be chosen based on your financial goals
Lock-in Period 5 years No lock-in period (except for ELSS funds, which have a lock-in period of 3 years)
Regulatory Body Insurance Regulatory and Development Authority (IRDA) Securities and Exchange Board of India (SEBI)
Mortality Charges Based on age, gender, sum assured, etc. No mortality charges
Taxation ULIP premiums are tax-deductible up to ₹1.5 lakh per annum according to Section 80C of the Income Tax Act, and the maturity amount is also tax-free under Section 10 (10D) of the Income Tax Act, 1961 Mutual funds are not tax-deductible unless they fall under Equity Linked Savings Scheme (ELSS)
Range of Investment Options Only standard equity and debt variants Equities, bonds, gold, commodities, international equities, and specific sectors or themes
Other Expenses Include premium allocation charges, administration charges, fund management fees, and mortality charges Asset management company applies entry and exit charges
Risk Cover The sudden demise of policyholder offers compensation to their family Doesn’t cover the risk as it is meant for wealth creation
Liquidity Less liquid as the lock-in period is more More liquidity compared to ULIP

When should you consider ULIP or a mutual fund?

Choose ULIP when you want either or all of the below things Choose mutual fund when you want either or all of the below things
To enjoy triple benefits like wealth creation, insurance coverage, and taxation benefits To accumulate wealth 
To avail multiple purposes such as accident coverage, retirement planning, or securing a child’s future To avail multiple purposes like diversification of portfolios, liquidity, and high returns with risk
To employ multiple investment strategies under a single platform for different goals To achieve your goal with a focused single investment strategy 
To get assured sum at the untimely demise of policyholder To offer mutul fund amount to beneficiary 


Investing in any financial instrument depends on the investor’s financial needs and purposes. Therefore, you should pick the one that best suits your needs. However, you must know that both Unit Linked Insurance Plans and Mutual Funds have their pros and cons. If you wish to enjoy multiple benefits under a single platform, tax benefits, and insurance coverage, ULIP is the better choice. In case, you already hold insurance coverage, mutual fund can be considered a good investment option. However, you must consider the following things before making any investment decision – market research, due diligence, duration of investment, and risk assessment.