Differences Between ULIPs and Mutual Funds

Both ULIPs (Unit Linked Insurance Plans) and Mutual funds are investment tools that grant access to debt instruments and equity. A person who wants to invest according to their risk appetite will find either of these an ideal option. However, despite their appearance, they do have differences, which are:

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Sum Assured

All ULIPs offer life insurance, hence the name. However, mutual funds rarely have an insurance component. Only in some cases, a mutual funds scheme may offer a term insurance plan.
ULIPs, by default, offer the benefits of investment and insurance. For instance, an investor may buy a ULIP scheme at a premium of Rs. 100,000 for a sum assured of Rs. 1,000,000. If the person dies during the term the provider will pay the nominee (chosen by the investor) the sum assured. However, if the investor survives the tenure then they will get the fund amount.

Charges

ULIPs have assorted charges such as mortality fees, premium allocation fees, fund management fees, etc. which can be a lot when combined together. In the case of mutual funds, all charges viz. management fees, administration fees, etc. are grouped into one, which is called expensive ratio. Usually, it doesn’t exceed 2.5% of the assets.

Lock-in Period

Most ULIPs have a minimum lock-in period of five years, and the investor can’t redeem them during this period. However, in mutual funds, there is no such contingency.

Tax Benefits

ULIPs can provide tax benefits if the premium paid is not more than 10% of the sum assured. However, in mutual funds, there are no tax benefits, unless its ELSS funds, in which case the investor can claim tax deduction under section 80C.