Mutual Funds and Unit-Linked Insurance Plans (ULIPs) are two popular investment options in India. Both offer remarkable opportunities for investors to generate considerable wealth over the long term.
Even though both investment options can deliver high returns, they significantly differ in fees, structure, and benefits. In this article, we will compare mutual funds vs ULIPs and determine which is a better investment option for you. But before that, we will give you a quick run-through of the two distinctive investment options.
Let’s find out!
An Overview of Mutual Funds
Before you start investing in mutual funds, you need to have a clear idea of ‘what are mutual funds.’
Mutual funds are a typical investment option that involves pooling money from various individual and institutional investors sharing a common objective. Next, the pooled money is invested in a variety of debt and equity instruments managed by professional fund managers. Basically, they make investment decisions on behalf of the investors.
There are several types of mutual funds that are categorised on different parameters. They include the duration, market type, risk factor, etc. In fact, the profit generated from the assets allocated in a mutual fund is then distributed among investors. However, this distribution is performed after deducting levies and expenses that are calculated using the Net Asset Value (NAV).
An Overview of ULIPs
Now, if you are thinking ‘What are ULIPs’, then we will provide you with a quick and concise answer!
Unit-Linked Insurance Plans (ULIPs) are a unique investment instrument that has been recently added to the financial product landscape. It provides excellent insurance coverage while generating ROI across several avenues.
ULIPs invest in debt instruments, equity shares, and bonds that are quite similar to mutual funds. They are basically a hybrid of insurance products and investment plans that enable investors to invest in debt, equity, or both. In fact, the investors acquire the flexibility to switch between asset classes as and when required.
ULIPs also offer plenty of benefits, including tax exemption, partial withdrawal, premium protection, etc., despite being partially market-linked.
Difference Between Mutual Funds and ULIPs
At first glance, both investment instruments are identical. But the truth is, they are not. There are plenty of differences between the two.
Here, in this table, we have pointed out some significant differences between ULIPs and mutual funds:
| Parameters | Mutual Funds | ULIPs |
| Objective | Wealth Creation | Insurance Cover and Wealth Creation |
| Regulatory Body | Securities and Exchange Board of India (SEBI) | Insurance Regulatory and Development Authority of India (IRDAI) |
| Tax Benefits | Nothing other than ELSS qualifies for tax deduction under Section 80C of Income Tax Act | The premium paid is tax deductible and the maturity amount is exempted from tax |
| Duration | Short-term, mid-term, and long-term as per investor’s choice | Specifically for long-term, and the lock-in period of 5 years might be applicable |
| Payment Mode | Invest either through SIP or lumpsum | You are required to pay a higher premium at regular intervals or a lumpsum amount |
| Management Expenses | Approximately 2.50% | Approximately 1.35% |
| Risk Metre | Not Secure | Somewhat secure |
| Ideal Investment Period | Long-term or mid-term. However, for some mutual funds like Liquid Funds can be invested for short-term | Long-term |
| Lock-in Period | Mutual funds don’t really have any lock-in periods. However, there’s an exception. ELSS comes with a 3 year lock-in period | ULIPs have a strict lock-in period of 5 years |
Which is a Better Investment Option?
If you are wondering between mutual funds vs ULIPs, which is a better investment option for you, then you should determine a few things first. Remember, the ideal investment option will depend entirely on your risk appetite, goals, and financial requirements.
While both options have unique features, benefits, and drawbacks, you must choose wisely. So, firstly, you need to evaluate your investment goals and then determine your risk appetite, followed by financial requirements. After you have determined these three primary factors, you can easily decide on an investing option.
Nevertheless, mutual funds can be your best-suited investment instrument if you have the following parameters:
- You desire high liquidity
- You have a short-term or a medium-term investment horizon
- You have a medium or high-risk appetite
- You already have a term insurance plan in place
But if you have completely different parameters, then you can always consider investing in ULIPs.
To Conclude
Both mutual funds and ULIPs have their own set of benefits and drawbacks. ULIPs are hybrid investment products that combine investment and insurance with higher fees and longer lock-in periods. In comparison, mutual funds are pure investment vehicles with lower fees and greater flexibility.
You can consider investing in Edelweiss mutual fund schemes as they come with a moderately low risk and generate higher returns. In fact, there are certain investment options that will enable you to invest in a portfolio of high-conviction stocks which can help you meet your financial goals.
