• HDFC securities
• 07 Feb 2023
• Difference between ULIP and Mutual Funds,Knowledge Centre

In today’s age, most of us are aiming for long-term wealth creation so we have a nest egg to retire peacefully and pass down funds to future generations. To that end, investment has become a key factor and you can choose from a variety of options. However, it becomes integral to make the right choice when it comes to an investment instrument. To help you make an informed decision, we are providing a handy guide on the difference between two such instruments; ULIP and mutual funds.

What is a Mutual Fund?

A mutual fund is an investment option wherein funds are pooled from various investors and invested in different financial instruments such as debt, equity, etc. It is a great option for those who want to invest in the stock market indirectly while creating a balanced portfolio.

What is a ULIP?        

ULIP refers to a Unit Linked Insurance Plan and is a combination of an insurance plan along with an investment option. With a ULIP, a policyholder gets to avail of a life insurance cover and ensures that a nominee receives a death benefit once the policyholder passes away. However, a portion of the premium is invested in instruments similar to a mutual fund, allowing investors to earn returns as well.

Which is Better; ULIP or Mutual Funds?

To understand which investment instrument is better, it is necessary to make a comparison between ULIPs and mutual funds.

ULIP vs Mutual Funds: Primary Differences

 

 

• Insurance:

The key difference between ULIP and mutual funds is the insurance coverage offered. When you invest in a ULIP you can enjoy the security offered by a life insurance cover along with investment opportunities. On the other hand, a mutual fund is purely an investment instrument.

• Lock-in Period:

Since a ULIP also offers an insurance policy, it comes with a lock-in period of 3 to 5 years. During this time, you cannot access your initial investment. On the other hand, mutual funds do not come with any lock-in periods and you can redeem your investment as and when needed. The only exception is an Equity-Linked Savings Scheme (ELSS) investment which has a mandatory holding period of 3 years.

• Liquidity:

Mutual funds offer high liquidity as you can withdraw your funds anytime when needed. On the other hand, since ULIPs have lock-in periods, the liquidity offered is comparatively lower.

• Taxation:

When it comes to paying taxes, ULIP have an upper hand since they allow you to enjoy tax deductions on premiums paid to the tune of Rs 1.5 lakh per annum as per Section 80C of the Income Tax Act. On the other hand, mutual funds are not tax-deductible unless you have opted for an ELSS scheme.

• Expenses:

The expenses related to investing in ULIPs such as premium allocation charges, fund management fees, administration charges, etc tend to be higher. With mutual funds, you only have to bear the fees for the fund manager and exit loads.

Now that you know more about the differences when it comes to ULIP plans vs mutual funds, you can make an informed decision. Do note that when it comes to deciding which investment option is better, it all boils down to your personal financial goals and risk appetite.