This is one of the most commonly asked questions by a potential investor who is often confused by the mix use of these 2 investment instruments. Many financial planners use these terms interchangeably. However, ULIP and Mutual Fund are two separate concepts. We have explained the meaning of ULIP and Mutual Fund and the difference between them.
Mutual fund
Mutual fund is an investment plan where your money is managed by a portfolio manager. He puts your money into multiple companies on the basis of your investment objectives and associated risks. For every investment made in mutual fund, certain units of that fund are allocated to the investor. There are multiple types of mutual funds available in the market; each having its investment objectives, liquidity and risks.
Unit Linked Investment Plans (ULIP)
Unit linked investment plans are a hybrid combination of investment and insurance schemes. Herein, a small portion of the monthly premium goes to secure life insurance and the rest is invested just like a mutual fund.
Difference between ULIP and Mutual Fund
| Basis | Mutual Funds | ULIP |
| Regulating Authority | SEBI | IRDAI |
| Product Type | Investment | Insurance |
| Liquidity | Highly liquid | Less liquid |
| Potential Returns | High returns subject to market risks | Low returns as part of it are invested in the insurance |
| Lock-in period | Only in ELSS | 3 to 5 years |
| Tax benefits | ELSS are eligible for deduction under 80C.
Long Term- Equity Funds: Tax Free Debt Funds: 10% or 20% |
Deduction under 80C |
| Charges | Low- 1% to 2.5% | No upper limits |
| Portfolio Disclosure | Mandatory Disclosure | No such requirement |
Regulating Authority and Product Type
Mutual funds are an investment product and are regulated by the Securities Exchange Board of India (SEBI). The Unit linked investment plan is essentially an insurance plan with additional investment option.
Liquidity and Lock-in Periods
Multiple mutual funds options are available in the markets viz. equity, debt, growth, index, hybrid, etc. Most of the mutual funds are highly liquid as compared to less liquid ULIPs, as ULIPs are meant for a relatively long time. Usually, only ELSS mutual funds have a lock-in period, rest all mutual funds can be redeemed easily almost anytime.
Potential Risks & Returns
ULIPs are less prone to market risks are they are insurance instruments. Mutual funds are comparatively riskier as they invest directly into the market which is highly market. This volatility is also the reason why mutual funds give a higher return than ULIPs. ULIPs offer a safer but lower return as a chunk of it is invested in insurance policies.
Portfolio Disclosure
As per the rules of SEBI, the companies have to maintain a strict disclosure of transactions and such other information. SEBI has directed all fund managers to send the portfolio statement via email to its unit holders every month. Such rules and regulations help to ensure transparency and accountability. On the other hand, there is no such regulation for ULIPs.
Tax Benefits & Charges
The charges associated with mutual funds are as low as 1% to 2.5% which is far lesser than that of ULIPs. Charges on ULIPs have been reported to be as high as 18% and there are no such upper limits. ULIPs are eligible for deduction under section 80C. The ELLS category of mutual funds is eligible for deduction 80C. Mutual funds options other than ELSS do not have deduction under section 80C but they provide additional tax benefits such as returns on mutual fund up to a certain limit is exempt. Also, as per general reports LTCG on such mutual funds attracts much lesser tax.
