ULIP vs Mutual Fund: Difference, Returns & What to Choose

Ryan, a 35-year-old senior manager at a manufacturing firm in Pune, has been investing religiously for the last 8 years. But most of his investments are based on influential advice and peer recommendations. A few years back, still early in his career, he bought two ULIP policies. Later, following his colleagues, he also started SIPs in equity mutual funds.

Today, Amit is unsure what is actually working for him.

• The ULIPs show steady but muted growth, locked in for the long term.
• The mutual funds fluctuate more but appear to have grown faster.

He struggles to compare them because one combines insurance and investment, while the other is purely market-linked. When he tries to answer a simple question, “ULIP vs mutual fund, which is better for my long-term goals?”, he realizes he has never evaluated them on the same basis.

This confusion is common. People generally compare ULIPs and mutual funds solely by returns, without understanding their structures, costs, or purposes. This blog breaks down the difference between ULIP and mutual fund, how returns actually work, and how to choose what fits your goals rather than relying on generic comparisons.

What Is a ULIP and How Does It Work?

A Unit Linked Insurance Plan (ULIP) is a hybrid financial asset made of life insurance plans and market-linked investment components. It works in two parts, with a fraction of your premium covering life insurance, and the other invested in market-linked funds of your choosing.

If you’re considering buying a ULIP, here are a few more features you should be aware of:

• Lock-In and Cost Components: ULIPs usually have a five-year lock-in and multiple charges that reduce the amount available for investment.
• Fund Switching: Many ULIPs allow switching between equity and debt funds, though charges like premium allocation, fund management, and mortality costs may apply.
• Premium Flexibility: You can often choose the frequency and amount of premium payments.

ULIP offers dual benefits under one broad investment, a quality that attracts investors who prefer flexibility in their investment strategies. But this advantage needs to be maintained. Given the embedded costs and lock-in, investors need to make well-informed decisions based on their limits and goals. Influential investing can capsize portfolios and lead to huge losses.

What Are Mutual Funds and SIPs?

Mutual funds are pure investment vehicles, directly regulated by SEBI, that pool money from multiple investors to invest in diversified portfolios of stocks, bonds, or other securities. They are meant to generate returns based on market performance, without any insurance component.

A Systematic Investment Plan (SIP) is the most popular way to invest in mutual funds. People invest a fixed amount regularly (usually monthly), and fund managers distribute the investment among different assets as per the present market situation. This way, investors can practice disciplined investing without going in over their heads and look forward to more stable and solid growth over the long term.

Mutual funds offer high liquidity with no mandatory lock-in for most schemes, with certain exceptions like ELSS. They provide transparency in costs and holdings, resulting in their growing popularity in all investor groups. SIP contributions have surged as well, with more households choosing long-term investment options, supported by rising industry assets and strong inflows.

New to SIPs? Explore our complete guide to SIP investment to understand how systematic investing works over time.

Difference Between ULIP and Mutual Fund

The difference between ULIP and mutual funds is clear in purpose, cost, lock-in, tax, and flexibility. Here’s a simple comparison overview:

ULIP vs Mutual Fund Returns: Which is Better?

While comparing returns between ULIPs and mutual funds, investors need to understand that even though both funds are market-linked, how returns are realised and reflected can be different.

What Should Investors Expect?

ULIP returns are influenced by policy charges and the chosen asset allocation. Because part of the premium covers insurance and various fees, the net amount invested is often lower during the early years, which can reduce the returns. Mutual funds, particularly equity funds, invest 100% of contributions into the market, which can translate into stronger long-term performance if markets grow.

For example, equity mutual funds are known to deliver long-term returns, occasionally exceeding 15-20% in strong periods, especially when invested via disciplined SIPs. On the other hand, ULIP returns typically fall into a broad range depending on asset mix and costs.

Investors should focus more on post-cost, long-term returns over nominal figures. Cost transparency, time horizon, and clarity of investment goals are important factors that drive high-return investment strategies.

Which Is Better for Long-Term Goals?

The difference between ULIP and SIP lies in priorities and investment goals in the current life stage. Both plans offer long-term results, but the investment strategies differ significantly.

SIP offers disciplined investment with high flexibility across all funds. You can start small, pause contributions, switch funds freely, and remain invested for as long as needed. They also allow you to adjust allocations as goals change and provide higher liquidity.

ULIPs, with premium commitment and a 5-year minimum lock-in, are more rigid and usually incur charges or policy changes when changes are made. For long-term goals like retirement or child education, a more agile and cost-friendly SIP in mutual funds can be a preferable option.

For many investors focused on pure long-term growth or strategic allocation, mutual funds via SIP prove to be a simpler and more flexible choice, though ULIPs may still suit specific circumstances.

If you’re also deciding how to invest in mutual funds, our SIP vs lump sum investment comparison explains which approach suits different financial goals.

When Can a ULIP Make Sense and When It Doesn’t

ULIPs can make sense in certain scenarios:

• If you want life insurance cover and market exposure in one product
• When you plan to stay invested for the long term (more than 7 years)
• If tax benefits under Section 80C and potential exemption under 10(10D) align with your planning

However, ULIPs may not make sense when:

• You prioritise pure investment growth with minimal costs
• Liquidity and flexibility are important to you
• You already have adequate life insurance and want separate investment solutions

In many cases, combining a term insurance policy with mutual fund investing offers better clarity, lower cost, and more flexibility compared to a ULIP.

How Novelty Wealth Helps You Choose What’s Right for You

Comparing and choosing between ULIP and a mutual fund needs clarity about what aligns with your personal goals and risk tolerance. Novelty Wealth helps you map out clear financial goals and choose the asset most fitting for that plan. This goal-based planning gives you a clear investment picture under a unified finance management platform. This removes isolated focus and broadens your view to support balanced allocation, informed decision-making, and helps you understand what to expect over time.

Novelty Wealth takes data from all your holdings into account and offers insights through a mutual fund portfolio tracker, showing where every investment rupee is working, where gaps may exist, and how different investment components contribute toward long-term goals. This broad approach helps you compare ULIP vs MFs and decide which one is better for your investment plans.

Conclusion

ULIPs and mutual funds serve different purposes. Both offer long-term growth, but the mechanisms differ, and performance is affected by the market differently per product. ULIPs offer insurance as well as market exposure, whereas mutual funds focus on investment growth and flexibility. Before picking one, investors need to be clear about their financial goals, cost-aware, and whether they require flexibility in investments or not.

Platforms like Novelty Wealth help clear your view and let you decide on more practical investments based on your portfolio performance across all investments. With a clear understanding and expert guidance, you can secure your financial future for long-term growth.