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Which is a Better Investment - Mutual Funds Or ULIP?

Mutual Funds vs ULIP has always been a question while investing in wealth creation schemes. Know why ULIP investment are more fruitful than mutual funds.

  • 6,500 Views | Updated on: May 27, 2024

Today, we have a plethora of alternatives to choose from in every area - from food to clothing to financial investment tools. The number of options are far too many and it can get incredibly overwhelming and intimidating at times. With growing awareness for the need and importance of financial planning, it’s more necessary than ever to invest your money in plans that will provide you with high returns in the future. These days, people make comparisons to invest in the best schemes possible so as to make the most of their invested money. In this article, we will look at the difference between ULIP and Mutual Funds to better understand how each investment scheme works.

All About ULIP vs Mutual Funds

Unit Linked Insurance Plan

ULIP or Unit-Linked Insurance Plans provide investors with both life insurance and an opportunity to invest their money. They differ from traditional insurance plans since they provide higher returns by investing in a variety of assets.

Mutual Funds

A mutual fund is a form of investing technique in which a group of people combine their money. After a large quantity of money has been accumulated, it is invested in a variety of financial instruments, including stocks, bonds, and other fixed-income assets. Professional fund managers are in charge of managing the distribution of the funds and making investments on behalf of the investors.

Features Of ULIP

Lock-In Period

ULIPs have a lock-in period of 5 years. If you redeem money before the 5 year period, you are charged with a penalty fee.


With ULIP insurance you have the option of deciding how much of your money should go into assets and how much should go into life insurance. Furthermore, based on the market performance and worth, you have the option to switch between the funds offered.

ULIP Returns

Returns on long-term ULIP investments are generally quite promising because of the flexibility they offer. Although, it must be noted that the returns are mostly determined by market success.

Tax Advantages

Section 80C of the Income Tax Act of 1961 allows for tax exemptions on insurance premiums paid. Furthermore, the maturity amount is tax-free under Section 10 of the Internal Revenue Code (10D)

Features Of Mutual Funds

Lock-In Period

In the comparison of ULIP vs Mutual Funds, the latter has a lesser lock-in period. Even mutual funds, such as the ELSS, have different lock-in periods (three years).


The difference between ULIPs and mutual funds is that mutual funds do not offer flexibility because you cannot swap between the fund options.

Mutual Fund Returns

Different mutual funds have different outcomes. Investing in equities mutual funds will give you a good return, whilst debt mutual funds will give you lesser due to higher risk.

Tax Advantages

The tax benefits of mutual funds are limited since only the Equity Linked Savings Scheme mutual funds are eligible for tax refunds of up to 1.5 lakh under Section 80C of the Income Tax Act, 1961.

Difference between Mutual Funds and ULIP



Mutual Funds


Investment with insurance benefits

Investment benefits


Long term:10-15 years

Ideal for short and medium term investments

Return on investment

The returns are usually high as it is equity-based. Plus, insurance benefits

The returns are usually high as it is equity linked investment. No insurance component.

Tax benefit

Available under Section 80C.

You only get tax benefits for ELSS.

Lock-in period

3-5 years

None at all

Switching options

You can switch between different investment instruments.

You can’t switch since these are standalone funds, You can only exit a fund.

When to consider

Good for protection and wealth growth both in one single premium

If you need high returns with no protection component.

To summarise, the decision to invest in ULIP or Mutual Funds is totally up to you. After careful consideration of your budget, risk appetite, and personal long and short-term goals, you must choose between, you can go for the one that suits you best!

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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

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