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Why ULIPs are Better Option than Mutual Funds?

News Agencies | Updated on: 12 December 2018, 15:20 IST
Mutual Funds

Why ULIPs are Better Option than Mutual Funds?

Absolutes apart, it is important to clarify that the choice between ULIPs and mutual funds counts on the subjective preferences of potential investors. Investment in any scheme whatsoever depends on the risk- taking capacity of the concerned investor.

For quite some time now, the interest in the prospects of ULIPS has been steadily surging alongside the more popular mutual fund schemes. Indeed, the latter is clearly more popular among the common masses; however, against the backdrop of returns and affordability, it is significant to weigh both against each other.

Mutual Funds VS ULIPs

As far as the prospect of ULIP VS Mutual Funds is concerned, it is important to consider each on a separate basis in order to clearly comprehend the distinctions.

So far as mutual funds are concerned, they are nothing more than homogeneous investment schemes. In this regard, mutual fund schemes are some of the most linear and one-dimensional investment prospects for the conventional investor.

Also, it is important to bear in mind that with mutual fund schemes tax saving deductions are not available with every other insurance plan. Importantly, one may claim tax deductions only in the case of equity-linked saving schemes. Additionally, the concerned investor is able to withdraw funds within a year; however, in that case, a one percent fund value is whittled away.

Relatively speaking, mutual fund schemes constitute higher fund management charges.

ULIPs, on the other hand, stand out in marked features. One of the foremost differences lies in the fact that ULIPs are not only investment schemes but also facilitators of significant insurance cover. Also, no matter what the amount of money invested, it is deducted from the total taxable income, according to Section 80C of the Income Tax Act of India.

What is especially significant to consider is that unlike mutual fund schemes, ULIPs have a lock-in period of five years. As a result, they have limited liquidity. The five-year lock-in period is the minimum span of time. Additionally, in marked contrast with mutual funds, the fund management charges are significantly lower, around 1.35 percent.

In spite of the tangible differences, people still tend to get confused about mutual funds and ULIPs. In a nutshell, in order not to forget, one must note that the latter offers life cover apart from investment returns. The insurance thus provided acts as an essential shield to the concerned investor in times of dire need.

Benefits of ULIPs

As far as the prospects of ULIP VS Mutual Funds are concerned, the benefits of the latter are mostly lit upon in various circles. As a result, investors are more thorough with mutual funds but not with ULIPs. The following are some of the essential advantages of ULIPs:

Many, if not all, ULIP products in the market come with additional riders in order to suit the needs of a specific clique of investors.

Most of the times ULIPs guarantee future cover. For example, a child’s education is one sphere where ULIPs are extremely beneficial.

There are some ULIP products which offer a lump sum amount on the death of the concerned investor in order for the family to cope up with the costs of the child’s educational requisites.

Additionally, what is especially significant about the scheme is that the concerned company is bound to pay the funds’ premiums on the deceased parent’s behalf.

As far as the rest of the family is concerned, the scheme provides a regular income throughout the tenure of the plan.

Apart from the aforementioned benefits, ULIPs are excellent in the aspect of tax savings. On the other hand, most mutual fund schemes do not always help save tax. It is in this respect that ULIPs notch it up to a considerable degree.

ULIPs allow tax deductions under Section 80C of the Income Tax Act of India. As a result, the money one owes to the government is reduced by a significant level. Mutual funds, on the contrary, do allow for tax deductions only in certain circumstances or schemes. For instance, ELSS allows for tax savings.

The Aspect of Fund Charges

As far as the prospects of ULIP VS Mutual Funds are concerned, the aspect of fund charges is one significant area to consider. To put in a nutshell, the fund management charges of the two differ on various grounds.

As far as mutual funds are concerned, a fund only charges for the management of money and as an exit fee. The exit fee is the penalty for selling units straight away after the investment in a scheme. On the other hand, ULIPs charge under such parameters as allocation charge for the premium paid, charge for administration and, essentially, for the management of the fund. There is yet another aspect known as the mortality charge. The mortality charge is the one which includes the amount of the insurance premium.

As mentioned before, the fund management charges of the ULIPs are lower than those of the mutual funds. According to the mandate of the IRDAI, the gross charges on ULIPs should not be more than 2.25%. This translates into the assertion that the overall amount on a ULIP can never outstrip those of a mutual fund scheme.

Simply put, it is evident that ULIPs are a far better choice than mutual funds. It is common knowledge that higher charges affect the frequency of returns. As far as long-term prospects are concerned, it is clearly the ULIPs which fare better.

Choice Depends on the Investor

As mentioned at the outset, there is no one absolute factor which might help us clearly differentiate between the two equally relevant schemes. The choice of a particular investment scheme depends upon the needs and risk taking abilities of the investor involved.

Consequently, certain common expectations or preferences may be referred to. For instance, if a potential investor tends to insist on the liquidity aspect of the investment, clearly mutual fund is the better choice. As mentioned before, ULIPs have a five-year lock-in period during which the money is immovable and therefore rendered irrelevant in this aspect.

At the same time, it is equally important to keep in mind that not all mutual fund schemes are liquid. One of the most common instances is the ELSS which has a lock-in span of three years. Therefore, as things stand, it is clearly up to the concerned investor to decide after having considered the subjective situation.

Also, in order to make informed decisions in this matter, it may be advised to consider consulting insurance experts who can facilitate a thorough vision of investment schemes after having weighed the individual preferences and risk taking abilities of the potential investor.

In order to decide upon which is the better option, a potential investor needs to consider, among other factors, the following evident aspects:

The risk-taking ability of the concerned investor

The clarity of financial goal; in other words, it is important to consider whether one needs the money for exigent expenses or retirement plans.

The importance of considering whether one needs a life cover.

Lastly, the investment capacity of the investor should be taken into consideration.

The aforementioned factors are only the most fundamental ones to consider while choosing between ULIPs and mutual funds. There may be additional, more subtle, aspects to be considered too in order to make a more informed decision.

Moreover, whatever the investment choice, it is extremely important to thoroughly go through the terms and conditions before picking a scheme. Most of the times, investors tend to overlook the importance of noting the fine print and eventually end up landing troubles. Therefore, in all circumstances, the imperative to consider the specific terms and conditions should not be undermined.


As far as the prospects of ULIP VS Mutual Funds are concerned, there are differences which inevitably make one weigh over the other concurrently. However, there are certain conclusions which may be drawn out in order to round it up in a clarified manner.

As far as ULIPs are concerned, they are generally for those with a long-term economic plan devoted to wealth creation and insurance cover. Also, as mentioned before, the advantageous duality of the ULIPs are significant in that they offer the benefits of two plans in a single policy. As a result, ULIPs are extremely advantages as provident storehouses for future concerns such as retirement plans or child’s education. Indeed, it is this aspect of the dual benefit of savings and protection which renders ULIPs especially favourable among investors.

Additionally, it is important to note that ULIPs are especially suited for those investors who are not at ease with the prospects of the equity market. Especially, the different fund choices available with a mutual fund scheme may not hold any significant appeal for those who tend to focus on the prospects of long-term capital appreciation and future-oriented aspirations.

In the end, it is up to the concerned individual to accurately weigh his or her situational contingencies in order to arrive at a convenient decision.

First published: 12 December 2018, 15:20 IST