Comparing ULIPs and Mutual Funds: Which Offers More Control Over Your Money?


When it comes to investing, both Unit Linked Insurance Plans (ULIPs) and mutual funds are popular options. ULIPs and mutual funds offer investors the opportunity to grow their money, but they have some key differences. This article will compare ULIPs and mutual funds and discuss which offers more control over your investment. But first, let us look at the core meaning of ULIP investments and mutual funds.

Understanding ULIPs 

What is a ULIP? ULIPs are insurance policies that provide both life insurance coverage and investment opportunities. ULIPs offer an alternative to typical life insurance investments’ risk-free, low-return structure. ULIPs provide market-linked returns, unlike endowment or money-back plans. Through ULIPs, you can invest in a variety of market-linked funds, which can be Equity, Debt, Hybrid, or Liquid funds. In ULIPs, the premium you pay is invested in the funds of your choice after the deduction of applicable charges. The investment returns on ULIPs can be subject to capital gains taxes, just like other investments, if the annual premium exceeds ₹2.5 lacs.

What are mutual funds? 

Mutual funds are a type of investment tool that pools money from investors to invest in diverse financial instruments like stocks, bonds, etc. Mutual funds are managed by experienced fund managers who make investment decisions on behalf of the investors. The investment returns on mutual funds are also subject to capital gains taxes. Each mutual fund type has a particular risk-return profile that makes them suitable for different kinds of investors.

Now that you have an overview of these two types of investments, here’s taking a closer look at which one gives you more control over your money.

Key differences from the control aspect 

Due to their market-linked nature, ULIPs are frequently mistaken for mutual funds, but they are different since they offer life insurance coverage, which mutual funds do not. While mutual funds are regulated by SEBI and the self-regulatory Association of Mutual Funds in India, ULIPs are governed by the Insurance Regulatory & Development Authority of India (IRDAI).

Regarding controlling your money, both mutual funds and ULIPs are well-matched. In mutual funds, investors can choose the type of fund they want to invest in, such as equity funds, debt funds, or balanced funds. They also have the option to switch between different funds depending on their investment goals and risk appetite. Yet, from that perspective, ULIPs also enable investors to choose the funds that they invest in. There is also a periodic swapping facility where investors may switch funds depending on changed priorities, financial goals, and market movements.

In addition, ULIPs provide income tax deductions on insurance premium payments, whereas mutual funds do not, except for ELSS funds, which are eligible for similar tax deductions up to Rs. 1,50,000 under Section 80C. All ULIPs qualify for section 80C tax benefits if investments comply with the tax-saving requirements. Only Equity Linked Savings Schemes (ELSS) plans in mutual funds provide tax benefits under 80C. Certain mutual funds under RGESS (Rajiv Gandhi Equity Savings Scheme) also offer tax benefits to first-time stock investors under 80CCG. Yet, ELSS capital gains are taxed in a similar manner as equity funds. ULIP proceeds are exempted under Section 10 (10D) if the annual premium paid for the same is not more than Rs. 2.5 lakh. The proceeds also have a capital gains exemption of up to Rs. 1 lakh. Anything above this will be taxed as per applicable LTCG and STCG rules.

In ULIPs, the investment options are limited to the options provided by the insurance company. Additionally, ULIPs have a lock-in period of 5 years, during which the investors cannot withdraw their money. Among mutual funds, ELSS funds have a lock-in period of 3 years.

In conclusion, ULIPs and mutual funds are popular investment options that offer investors the opportunity to grow their money. Certain mutual funds can be your ideal option if you wish to invest for short-term liquidity. However, for long-term investments that also provide tax benefits, you should go with a ULIP.

ULIPs combine insurance and investments, which is a significant boon for investors. They are also excellent at mitigating risk through fund-switching and rebalancing features. Hence, you should look at having both these options in your portfolio, with ULIPs more geared towards achieving long-term objectives while mutual funds are more suitable for a short-term play, depending on your risk appetite.