Know Why ULIPs Are Better Than Mutual Funds (SIP) for Your Investment Portfolio


There has always been a debate on whether Unit-Linked Insurance Plans (ULIPs) or mutual funds are a better investment. First of all, ULIP is an insurance plan and not just an investment product. Why are we comparing an insurance product with an investment product? Understand the differences between the two products and make a well-informed decision.

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What is the difference between the two investment options?

If you are looking for a plain investment product, mutual funds will serve your purpose. However, if you see a double advantage in the form of coverage for your family while earning benefits from the investment, ULIPs can do the job. It is important to understand both the products before making a decision.

ULIP is an insurance product, which divides the premium amount into two segments. One segment goes towards your insurance policy while the other segment is invested into funds that reap you returns over a period of time. It offers a cover for risk while helping you grow your wealth and achieve your life goals over time. Mutual funds are investment products that are managed by fund managers. The amount you invest in a fund will be further invested in debt and equity, in order to generate returns for you. It is a pure investment product. The returns in both the cases may vary.

Why choose ULIPs?

There are a number of benefits of choosing ULIP over mutual funds. Your investment portfolio will remain transparent and you will be able to track the fund value with ease and convenience. You have the flexibility to change the amount and tenure of the premium. You can also switch between funds and there is no tax implication on the same. There is also an additional life insurance benefit you get on purchasing a ULIP. Hence you can say it is an investment plus a life insurance product.

How is ULIP better than mutual funds?

ULIP is similar to mutual funds in terms of the structure but it has an advantage over mutual funds. It is beneficial to choose ULIPs for an investment portfolio to generate higher returns on the investment due to the following reasons.

Dual advantage

ULIPs offer a dual advantage of insurance and returns on investment for the single premium. You are eligible for an insurance cover, which is a minimum of ten times of the annual premium. This is the major advantage when comparing ULIP vs mutual funds.

Wide choice of add-on covers

The benefit with ULIP is the additional cover offered in the form of critical illness cover and accidental benefits. The same is not available in case of mutual funds since they are only pure investment products.

Tax benefit

One of the obvious reasons for choosing ULIP is the tax exemption under Section 80C and Section 10(10D). The amount paid as a premium is allowed as a deduction under section 80C of the Income Tax Act.

Low risk

ULIPs are a low-risk product as compared to mutual funds. Because of the nature of insurance products, they have to be very careful when making investments in different funds. Mutual funds are considered a riskier option as it is totally dependent on the market and is a pure investment product. Equity mutual funds are riskier than debt and hybrid mutual funds.

Tax exemption on maturity value

In case of a ULIP, the maturity proceedings are exempted from tax if the investment is kept for a duration of five years and the sum assured is minimum five times the annual premium paid during all those years. In case of mutual funds, the maturity benefit is taxable.

Guaranteed return of the invested amount

Recently, many ULIPs offer a guaranteed return as a feature of the policy. This means you will not lose your money and will receive the minimum amount of your investment no matter how the market performs. There is no such guarantee with regard to mutual funds. You might end up losing money due to the volatility of the market.

Ability to switch

ULIPs provide the facility to switch between funds from time to time. There is no tax implication on the same and you can make a decision to switch based on the market movement and investment goals. Mutual funds also have the option to switch but it is not free.

Loyalty addition

If you make the payment of premium regularly, some ULIPs offer a loyalty addition for the same. This increases the value of the fund. There is no such facility in mutual funds.

These are only some of the benefits of investing in ULIP over mutual funds. There is no sure shot answer to the debate of ULIP vs mutual funds but when both the products are logically compared, ULIPs score over mutual funds. This is due to the low cost and dual advantage associated with ULIPs. ULIP is a hybrid product that tries to offer the best in terms of protection and returns. It has generated significant results over a period and is easy to maintain. Setting up an SIP is an ideal way of making investments from time to time. It brings financial discipline in life and ensures that no premium is missed out. The amount is automatically deducted from your bank account. It is not suitable to compare only the returns generated by both the products since the products vary in terms of functions and features. It is important to look beyond the historical returns. Consider your purpose of investment and risk appetite when making a decision.

Now that you have a clear understanding as to how ULIPs are much more beneficial investment product as compared to mutual funds, you may consider ULIP investment at the earliest.


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