Difference Between ULIP and Mutual Fund

Unit Linked Insurance Plan (ULIP) and Mutual Fund (MF) both are investment options but most of the people are confused whether to choose ULIP or MF. Many people are purchasing ULIP as it covers insurance as well as investment. Another main reason people buying ULIP is because of its agents. For mutual funds, there will be less advertisements, less agents and of course less pressure to take compared to ULIPs. Here we will see some differences between ULIP and MF.

  • ULIP is combination of insurance and investment but Mutual Fund is purely investment.
  • ULIPs are quite expensive as they recover the various charges such as premium allocation charges, fund management charges, policy administration charges, morality charges etc., Allotment of your premium into investments happens once these charges are deducted from the premium. It is the same case with Mutual Fund but the costs are low.
  • For example: Let us say your premium is Rs.10,000. Some charges like Morality Charges are deducted for your insurance cover, let’s say Rs.1,000. The agent who sold the premium to you will get 25% of your first premium, let’s say Rs.2,500. Now, your premium cost left for investment will be Rs.6,500. If (Net Asset Value) NAV of the fund rises, let say 30% in the first year, your portfolio worth will be Rs.8,450, not even equal to your premium. Whereas in MF the total amount is invested. However, transaction fees are applicable Rs.30 or 1.5% of amount invested per transaction whichever is lower. Earlier, charges called Entry Load of 2.25% used to there for Mutual Funds, but from 1st August 2009, they are removed.
  • ULIP’s are lock in period of three years and partial withdrawal is allowed after 3 years, whereas in MF there will be no lock in period except for tax saving schemes.
  • Minimum monthly investment available in MF is Rs.500 where as in ULIP the premium will be more than Rs.1,000 per month.

If a person really needs insurance with low cost, it is better to choose the term insurance with low cost and get high premiums and if the same person also needs investment, it is better to choose the Mutual Fund. Financially it is not good to choose the combination of insurance and investment. Insurance is different from investment.

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