Written by : Knowledge Centre Team
2026-06-23
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7 minutes read
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There was a time when investing was associated only with stocks and other risky assets. But as the years have passed, consumers choices have been increased. Now you have more than five different types of mutual funds, ULIPs and many other professionally managed, tightly regulated and diversified investment options.
You can choose to invest your hard-earned money as per your risk appetite, comfort and affinity to certain asset classes.
When you think of investing your money in the market safely, the two instruments, Mutual Funds (MFs) and Unit linked insurance plans (ULIPs), would be the best choices.
These both are great financial products and are known for providing good growth of investment to their users. But which one should you invest in and when? Let’s dig deeper and discover. But first…
What are Mutual Funds?
Mutual funds are investment instruments that collect money from investors creates a pool and invests the money in different assets to provide investors return. These funds are tightly regulated by SEBI (Securities & Exchange Board of India).
Mutual funds have been classified based on their asset class, investment strategy, management, and even the holding period.
What are ULIPs?
ULIPs are life insurance plans which focus on market-linked growth of investment, rather than offering a guaranteed or fixed return. ULIPs will offer multiple funds for you to invest your money within the same policy.
The fund options within the ULIP are classified primarily based on their asset class.
Thus, you can say that a ULIP is a portfolio of funds that you can manage as per your comfort and acumen. ULIPs also provide you with automated strategies, so that you can manage your aggressive investments passively.
Difference Between Mutual Funds & ULIPs
Though this was the principal difference between the two, there are other differences as well. Let’s take a look at all of them.
| BASIS | ULIPs | Mutual Funds |
|---|---|---|
| Meaning | Type of financial product which combines both investment and insurance in a single product | A financial trust in which money from a large number of investors is pooled together and then invested in funds to get a return. |
| Additional protection | Yes, Additional protection along with life cover is offered. Riders can be added | No additional protection is offered |
| Tax benefits | Deductions of up to Rs 1.5 lakhs per year for invested money. Maturity value and withdrawals exempt from tax u/s 10(10)D | Deductions of up to Rs 1.5 lakhs per year for invested money in ELSS funds only. |
| Charges | ULIPs have charges which can range from 0.50-1.35% (Max limit: 2.25%) | Mutual funds charges have a rate of 2.5% |
| Regulation | IRDAI | SEBI |
| Flexibility | Very flexible. The amount can be transferred to different funds anytime | Less flexible |
| Lock-in period | 3-5 years | No lock-in period. 3 years in ELSS. |
| Duration | Long term investment | Both Long-term/short term |
Protection from Contingencies
ULIPs carry certain additional protection in them. These are called riders. ULIPs provide advantages such as a premium benefit fund under this the company pays the remaining premium after the death of the life insured.
This can help the family in achieving a specific long-term goal without the tension of paying the premiums after the breadwinner’s death.
Mutual funds, on the other hand, are strictly investment-based and offer no such additional protection to you.
Tax Saving Benefits
While going for any investment, you will surely look for the tax benefits involved with them. ULIPs and mutual funds both have tax benefits. Following tax benefits apply to ULIPs and specific Mutual Fund schemes:
| Mutual Funds | ULIPs | |
|---|---|---|
| Tax saving benefit of Rs 1.5 lakhs per annum u/s 80C | Only ELSS plans | All Plans |
| Tax on switching between two funds in the plan | Not possible | No tax |
| Tax on withdrawals after the lock-in period | LTCG if gains exceed Rs 1 lakh. Lock-in period of 36 months for every Unit | Exempt from Tax (conditions applicable) Lock-in period of five years for the entire plan |
How to Ensure Tax-Free Withdrawals & Maturity from ULIP?
ULIPs are one of the most tax-efficient aggressive investment options available in India. However, you need to take care of the following conditions to keep your ULIPs tax-free:
- Annual investment should not exceed 10% of the base life cover of the plan.
- Total annual investment in all such plans started on or after 1st Feb 2021 should not exceed Rs 2.5 lakhs.
What are the Charges you have to Incur?
ULIPs incur charges in several different heads. These may include:
- Premium Allocation Charges
- Policy Administration Charges
- Fund Management Charges
- Mortality Charges (insurance premium)
While IRDAI regulation curbs the maximum annual charge ratio to 2.25% for ULIPs, the best online ULIPs do not even charge as much.
Policies such as Canara HSBC Life Insurance Promise4Growth Plus has no premium allocation as well as policy administration charges. Also, if you survive till maturity you will receive all the mortality charges along with the maturity value.
Thus Promise4Growth Plus ULIP only charges you only fund management charge. Fund management charges range from 0.50-1.35% pa depending on the funds selected for allocation.
On the other hand, mutual funds charges have been capped by SEBI to a TER ratio depending on the AUM or the total corpus under the fund.
Mutual fund’s TER (total expense ratio) are:
| Effective from April 1, 2020 | |||
|---|---|---|---|
| Assets Under Management (AUM) | Maximum TER as a percentage of daily net assets | ||
| TER for Equity funds | TER for Debt funds | ||
| On the first Rs. 500 crores | 2.25% | 2.00% | |
| On the next Rs. 250 crores | 2.00% | 1.75% | |
| On the next Rs. 1,250 crores | 1.75% | 1.50% | |
| On the next Rs. 3,000 crores | 1.60% | 1.35% | |
| On the next Rs. 5,000 crores | 1.50% | 1.25% | |
| On the next Rs. 40,000 crores | Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof. | Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof. | |
| Above Rs. 50,000 crores | 1.05% | 0.80% | |
Which of these Provides more Flexibility?
ULIP policies give you a chance to rotate your money between different market securities and that too anytime. You can change your volume of funds in debt and equity. E.g., if the market Is bullish, you can invest a larger proportion towards equity.
ULIPs such as Promise4Growth Plus provide you with a safety switch option as well that protects gains made by you in the ending stages of your policies.
Mutual funds however do not give you that option. It will only tell you that in which fund your money is invested. There is no option to rotate your funds, thus being less flexible.
Lock-In-Period for Investment in ULIP
Yes, all ULIPs contain a lock-in period. The lock-in period as the name suggests is the period in which you cannot sell your investment.
1. Lock-in Period for ULIPs: 5 years
- Lock-in applies to the policy and not on the units allocated within the policy.
- Regular premium payments to continue for the lock-in period (except for single premium policies).
- No partial withdrawals within this period.
- Fund movement within the policy is allowed.
- Death and premium protection benefit is available.
2. Lock-in Period for Mutual Funds (only ELSS): 3 Years
- Lock-in applies to the units instead of the fund from the date of purchase. So, each unit you purchase within an ELSS fund must complete the lock-in before it can be moved.
- Regular investment within the lock-in period is not necessary.
- Liquidation of units by sale to the fund is not possible within the lock-in period, you can only sell to another investor.
In the case of other mutual funds, there is no lock-in period. However, depending on the type (asset class) of the fund it may charge an exit load if you exit before the specified period.
Maturity Duration of the Plans
Maturity duration or the holding period of an investment depends on many factors. In the case of mutual funds and ULIPs also, the majority of these factors play a role. However, there is a fundamental difference between Mutual Funds and ULIPs when it comes to the maturity period:
- Mutual funds give you the flexibility to decide your exit plan any time after the investment
- You need to have a minimum maturity and investment period in mind before buying a ULIP
For example, you can enter an ELSS mutual fund knowing that it has a three-year lock-in period, and you may stay invested for more than 10 years. However, when you enter a ULIP you will provide a specific number for the following:
- Policy Term (PT or maturity period): Number of years you want the policy to continue
- Premium Payment Term (PPT): Number of years you will continue to pay the premiums
While PPT never exceeds PT, it is clear that you need a definite plan and discipline before getting into ULIP. Also, ULIPs in this manner are long-term plans, as in any case your investment tenure (PT) must be more than five years; i.e., the lock-in period.
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Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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