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Debt ULIPs vs. Debt Mutual Funds: What's the Difference?

Learn the difference between debt unit-linked insurance plans and debt mutual fund investments. Though both are savings and wealth schemes, debt ULIP provides a life cover.

  • Jul 05, 2022

Unit-Linked Insurance Plans, popularly known as ULIPs, have emerged as a prevalent financial tool. Similarly, the popularity of Mutual Funds cannot be hidden. Both ULIPs and Mutual Funds offer great returns and multiple benefits to the investors. However, both serve different financial goals and have varied risks. As ULIP and Mutual Funds are market-linked products, it is essential to know about them before investing money.

In this article, we will specifically focus on the debt fund-related discussion of both ULIP and Mutual Funds. Additionally, we will discuss the significant difference between Debt ULIPs vs Debt Mutual Funds.

What is a Debt ULIP?

As ULIPs allow you to enjoy dual benefits of both life insurance and investment, the investment part needs to be managed by the policyholder to ensure that the investment part of the premium is allocated to the suitable funds. This will help in the better growth of the ULIP investment.

When you buy a ULIP policy, you get an option to invest in market-linked securities. There are a few types of market-linked securities that you can invest in.

1. Equity

2. Debt instruments

3. Money market instruments, etc.

ULIP funds are the investment vehicles allowing investments in these market products. And based on the kind of market-linked security you can invest in through ULIPs, there are different types of ULIP funds:

1. Equity ULIP Funds

2. Debt ULIP funds

3. Hybrid Funds, etc.

The ULIPs funds are further divided into units. When you opt for a ULIP policy, based on your premium and the part of the premium to be invested into the market, you will receive specific units of ULIP funds of your choice that you can invest accordingly.


When ULIP policyholder chooses to invest his ULIP premium in the market-linked debt instruments, monkey-market instruments, government bonds & securities, etc., it is called a Debt ULIP.

What is a Debt Mutual Fund?

A Debt Mutual Fund is the type of Mutual Fund where the investments are made directly into debt or fixed-income securities. These include products like treasury bills, debentures, corporate bonds, commercial papers, etc

The best Debt Mutual Funds in the market earn a fixed interest rate as they deal with the best debt instruments that carry a lower risk than equity funds and other market funds.

Before investing money into them, it is advised to be well aware of the characteristics of the Debt Mutual Funds and how they function.

Debt ULIPs Vs Debt Mutual Funds


Debt ULIPs

Debt Mutual Funds

Investment Tenure

Long-term investment

Short/Mid-term investment


Offers life insurance with the policy

Does not offer life insurance option

Tax Benefits

Offers tax benefits at all three stages (E-E-E tax advantage). All stages, premium payment, proceeds, and maturity are exempted under sections 80C and 10(10D) of the Income Tax Act.

Does not offer any tax benefit. All income is taxable under different criteria.

Lock-in Period

Minimum 5 Year Lock-in period

No lock-in period. (*long-term Debt Mutual Funds may have an exit payload on premature withdrawal in case money is withdrawn before 12 months of investment. However, this depends on the policy guidelines)

Investment flexibility

Allows you to choose the premium amount and add top-up premiums. Moreover, you can switch between funds as per your requirement.

Depends on the Mutual Fund policy guidelines. Not as flexible as ULIPs

Management costs

May incur additional charges.

Comparatively, less costly

Risk Appetite

Low risk

Low to medium risk

Debt ULIPs and Debt Mutual Funds are good investment options. They are low-risk financial products that offer you multiple options to invest in. Based on your financial planning and choice of funds, you can invest in different debt securities like debentures, corporate bonds, treasury bills, etc. However, you must evaluate all the aspects of Debt ULIPs and Debt Mutual Funds and decide which one fits best your financial requirements before investing in them.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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- A Consumer Education Initiative series by Kotak Life

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