Differences between Unit Linked Insurance Plan and Mutual Funds

ULIP and MF may sound similar in structure, but there are various other things which separate these two investment tools.

Below is a brief comparison of ULIP and MF specific to the Indian market.

Primary Objective
Mutual Funds : These are  Investments
ULIPs: These are Investments with protection. (Insurance)

Investment Duration
Mutual Funds: It works out for Medium term, Long Term Investors. It is risky for Short Term investors.

ULIPs: It works out only for Long Term Investors .

Flexibility
Mutual Funds: It is Very flexible and plenty of scope to rectify your investment mistakes, if you made any wrong investment decisions. You can easily shuffle your portfolio in MFs.

ULIPs: Flexibility is limited to moving across the different funds offered with your policy. Correcting mistakes can turn out to be expensive. Moving funds from one ULIP to another ULIP of a different fund house can be expensive.

Liquidity
Mutual Funds: These are Very liquid. You can sell your MF units any time. Some MF’s like those from Reliance have introduced redemptions at ATMs.

ULIPs: These are limited liquidity.  Need to stay invested for the minimum number of years specified before you can redeem.

Investment Objective

Mutual Funds: These can be used for short term Objectives.

ULIPs: These can be used for achieving only long term objectives.

Tax Implications

Mutual Funds:

All investments in MF’s don’t qualify for section 80C.

Tax liabilities when moving across from debt to equity funds. (Returns from debt MF’s are taxed.)

ULIPs:

Provide Tax Benefits under section 80C

Very flexible in moving between equity and debt funds (not tax implications until  maturity of the policy).