ULIPs vs Mutual Funds: Which Investment Bears Better Fruit in the Long Run?


We all have different life goals. While, fitness goals, personal goals and financial goals; all require application and dedication to see them through to the end, financial goals prove to be the most daunting ones, especially in the absence of prudent investments!

The good news is, today there are various financial instruments available for investment planning, which enable one to build a corpus in the long run. And when it comes to building a corpus for long-term goals, mutual funds and ULIPs are the preferred choices of many!

But it doesn’t end here.

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There exist an interesting debate – which option is better for investment planning – Mutual Fund or ULIP? Well, it all depends on your needs, dependent family members, risk appetite, etc.

To help you make an informed choice, we have evaluated these two avenues to see how they measure up. Read on to know better

  1. Life Cover

ULIP is a life insurance product, therefore, it provides insurance cover to the policyholder along with the investment benefit. Here, some part of the premium is used for providing life cover, whereas the other is invested in equity and debt funds for wealth appreciation. Moreover, an investor can get life cover from minimum of ten times the annual premium to a maximum amount determined by the insurer.

Whereas, a mutual fund is a pure investment product; it does not include the insurance component.

  1. Add-on Riders

ULIPs are designed to take care of both your investment and protection needs. However, there may be some unexpected events in life like a critical illness or a permanent disability which may deter one’s ability to earn. By adding riders to your ULIP plan, you can secure yourself financially against such unforeseen events.

Riders like ‘Accidental Disability Rider’ or ‘Critical Illness Rider’ can be added by paying a nominal charge. This way, you are basically adding new benefits to your existing plan, and thus, enhancing your protection.

On the other hand, as mutual funds are pure investment products, they do not offer rider facilities.

  1. Tax Deduction on Premium Paid

When you invest in a ULIP plan, the premiums paid becomes eligible for deduction under Section 80C of the IT Act up to a maximum limit of Rs. 1.5 lakhs.

This advantage isn’t available if you are doing SIP in a diversified mutual fund. But, if you do SIP in the equity-linked saving scheme (ELSS), you can avail tax benefit under Section 80C just like ULIPs.

  1. Tax Exemption on Maturity Benefits

Maturity benefits in ULIPs are completely tax-free under Section 10 10 (D) of the IT Act, making them one of the best tax saving investments available today.

However, proceeds from mutual funds are not tax-free. Due to re-introduction of LTCG tax on equity mutual funds, gains above Rs 1 lakh are taxed (10 percent) without any indexation benefit.

  1. Loyalty Rewards

When you continue to pay ULIP premiums for a long time, many insurers offer additional units. This usually starts from the 11th policy year, wherein 0.3 percent of fund value is added to the existing fund by creation of additional units.

Loyalty rewards is not an option in mutual funds.

Snapshot of ULIPs Vs Mutual Funds



ULIP Mutual Fund
Scope Investment + Insurance Investment only
Purpose Offer life cover and returns on long-term investment Offer high returns from diversified investment
Risk Low to Moderate High
Lock-in Period Five years Three years (ELSS Funds)
Switching Funds Allowed Not allowed
Tax Benefits Tax deduction available on premium paid (u/s 80C and max up to 1.5 lakhs).

Tax-free maturity benefits (u/s 10 10(D)

Investment not exempt from taxation, except ELSS mutual funds.

Long-term gains are not tax-free.

Loyalty Additions Applicable Not Applicable

Our Take!

ULIPs and Mutual funds, both have their own set of benefits. However, ULIPS are backed by many investment experts as ideal investment planning tools. This makes sense because new-age ULIPs have only evolved to fulfil investor’s needs in a better way.

But, if liquidity is the main concern for you, meaning you need funds in the next three to five years, then it is better to go with ELSS funds.

But when it is the matter of long-term financial goals, consider adding ULIPs to your investment portfolio. Apart from the benefits mention above, ULIPs from reputable insurers like Max Life Insurance offer an additional option to switch funds which allows you to protect or enhance your fund value. They also come with lesser risks and lower costs in the long run. Moreover, from taxability point of view, ULIPs are definitely a better choice!

About the author

Rishabh Rajvanshi

Rishabh, with six years of experience in the newspaper industry, has co-founded The TeCake in 2013. Apart from writing and editing articles on Technology at The TeCake, he also contributes to other esteemed newspapers.

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