ULIP vs Mutual Funds: Which One Gives Better Returns?

Investing for the future is one of the most crucial decisions working professionals face today, but with so many options, it’s easy to feel overwhelmed. Investors frequently talk about the benefits of Unit Linked Insurance Plans (ULIPs) vs Mutual Funds when planning their portfolios. Because both promise growth, yet they operate in fundamentally different ways.

The problem arises when you try to figure out which one actually offers better returns in 2025. Should you choose mutual funds that offer flexible investment options alongside higher yields, or a ULIP that combines insurance protection with investment growth?

The real challenge is understanding how these two products differ, especially when both seem to have their own set of advantages. In this post, we’ll break down these differences, making it easier for you to make an informed decision that aligns with your financial goals, risk tolerance, and future plans. 

What is a Unit-Linked Insurance Plan (ULIP)?

A Unit Linked Insurance Plan (ULIP) is a unique product that combines life insurance with investment. This financial option has two advantages: it protects against life’s unforeseen events while also generating opportunities for wealth accumulation.

A portion of the premium money is used to guarantee your life insurance, and the remaining portion is invested in specific market instruments such as stocks, fixed income securities, or blended portfolios.

Key Features of ULIPs (2025 Update):

1. Dual Benefit Structure: ULIPs provide a life insurance cover as mandated by IRDAI regulations, while simultaneously investing a portion of the premium in market-linked instruments. The minimum life cover is typically 10 times the annual premium for policyholders below 45 years of age.
2. Investment Options: Policyholders can allocate their investment portion across various fund options based on their risk profile. These include equity funds (higher risk), debt funds (lower risk), balanced funds, and some insurers now offer specialized funds like ESG-compliant or sector-specific options.
3. Lock-in Period: All ULIPs maintain a mandatory 5-year lock-in period as per current regulations. During this period, investors cannot withdraw their funds, though most insurers allow limited fund switching between different portfolio options.
4. Charge Structure
   Various fee structures within ULIPs can significantly influence the net investment returns over time:
   • Premium allocation charges (typically 5-15% in first year, reducing subsequently)
   • Policy administration charges (annual flat fees)
   • Fund management charges (capped at 1.35% for equity funds)
   • Mortality charges for insurance coverage
   • Applicable GST (18%) on all charges

Understanding Mutual Funds in India

Mutual funds work by pooling the money of many investors to create a diverse portfolio of government bonds, corporate stock, and other financial assets. It is managed by professional fund managers, and mutual funds aim to provide returns based on the performance of the underlying assets.

Key Characteristics of Mutual Funds:

1. Built-in Diversification: By spreading investments across various companies and sectors, mutual funds automatically reduce the risk that comes from putting all your money in a single stock or bond. For example, an equity fund might hold shares of 50-100 different companies across multiple industries.
2. Focused on Investment Growth: Just like ULIPs that provide insurance with investing, mutual funds concentrate solely on growing your money through market investments. This one has no insurance coverage and is solely focused on increasing your financial holdings.
3. Diverse Portfolio Selection: Investors have the flexibility to pick from various fund categories aligned with their financial objectives and comfort with market fluctuations:
   • Equity funds (higher risk, higher potential returns)
   • Debt funds (lower risk, stable returns)
   • Hybrid funds (mix of equity and debt)
   • Specialized funds (focusing on particular sectors or themes)
4. Easy Access to Your Money: Most mutual funds allow you to withdraw your investment whenever needed, with the money typically reaching your bank account within 2-3 working days. The only exception are ELSS (tax-saving) funds which have a 3-year lock-in period.

Differences: ULIP vs Mutual Fund

To make it easier for you to compare, here’s a quick table that highlights the key differences between ULIPs and Mutual Funds:

Feature	ULIP	Mutual Fund
Nature of Investment	Hybrid (Life insurance + investment)	Pure investment vehicle
Lock-in Period	5 years (mandatory)	No lock-in (except for ELSS)
Taxation	Tax-free returns (under Section 10(10D))	Capital gains tax (LTCG/STCG)
Risk Factor	Medium to high (depends on fund choice)	Low to high (depends on fund category)
Flexibility	Limited flexibility in fund switching	High flexibility in switching funds
Insurance Coverage	Yes	No
Suitability	Long-term, conservative investors	Investors focused on returns

Comparing Returns: ULIP vs Mutual Fund

If you think about how ULIP vs mutual funds compete in terms of return, then understanding their return potential is crucial, though they achieve growth through different factors:

Return Potential Analysis

For ULIPs:
Returns depend on the chosen fund type (equity, debt, or hybrid) and market conditions. Equity-oriented ULIPs may deliver 8-12% annualized returns over 5+ years, while debt-focused ULIPs typically yield 6-8%. However, the final returns account for multiple deductions such as:

• Premium allocation charges (up to 15% in initial years)
• Fund management fees (1.35% annually)
• Mortality and other policy charges

For Mutual Funds:
Equity mutual funds have historically provided 10-15% returns over 7-10 year periods, though 2025 market conditions suggest more conservative estimates. Debt funds offer relatively stable 5-7% returns. Hybrid funds fall between these ranges based on their equity-debt mix.

Taxation Differences (2025 Update)

ULIP Taxation Benefits:

• Tax-exempt maturity benefits as per Section 10(10D) (subject to specific criteria)
• You can claim tax deductions for premiums paid and get maximum benefit of ₹1.5 lakh as permitted under Section 80C of the Income Tax Act.

Mutual Fund Taxation:

• Equity-oriented funds: 10% tax on long-term capital gains exceeding ₹1 lakh per fiscal year
• Debt-focused funds: Long-term investments (held over 3 years) are taxed at 20% after accounting for inflation benefits.
• STCG taxed as per income slab rates

Liquidity Considerations

Current IRDAI guidelines mandate that ULIP investments remain locked in for a minimum five-year duration. Partial withdrawals are permitted thereafter, but surrender charges may apply during early years.

Most mutual funds offer next-day liquidity (except ELSS funds with 3-year lock-in). Redemptions are processed within 1-3 working days, though exit loads may apply for early withdrawals depending on the scheme.

Risk Assessment

ULIPs has a moderated risk due to:

• Insurance coverage gives protection for life.
• Automatic portfolio rebalancing options
• Longer investment horizons smooth volatility

Mutual funds carry higher market risk because:

• Direct exposure to market movements
• No capital protection features
• Short-term volatility can be significant

Factors to Consider Before Choosing Between ULIP and Mutual Fund

Let’s find out several important aspects that directly impact your financial outcomes. Here’s what smart investors should analyze:

• Primary Financial Objectives: ULIPs make more sense when you need two things simultaneously – life insurance protection and wealth creation. They work well for long-term goals like retirement planning where the 5-year lock-in isn’t a constraint. Mutual funds are better suited when your sole focus is maximizing investment returns without any insurance needs.
• Risk Tolerance Levels: If market fluctuations make you nervous, ULIPs provide some cushion due to their insurance component. The life cover acts as a safety net during market downturns. Mutual funds, especially equity-oriented ones, expose you directly to market movements which can mean higher returns but also sharper short-term volatility.
• Investment Time Horizon: ULIPs demand a minimum 5-year commitment and work best over 10-15 year periods. Mutual funds offer more flexibility – you can invest for as little as 1 year (except ELSS funds which have 3-year lock-in). Your money isn’t locked in for long periods with regular mutual funds.
• Tax Planning Requirements: ULIPs score higher on tax efficiency – the maturity amount is completely tax-free under current 2025 tax laws if premiums don’t exceed 10% of sum assured. While most mutual fund gains are taxed, ELSS options qualify for tax deductions under Section 80C. High-income earners often prefer ULIPs for their superior tax treatment.
• Cost Structures: Both have different cost components that eat into returns: ULIPs have premium allocation charges, policy fees and fund management costs. On the other hand, mutual funds have annual management fees and sometimes early withdrawal penalties. Generally, mutual funds have lower overall costs but ULIP costs are front-loaded.
• Liquidity Needs: If you might need emergency access to funds, mutual funds (except ELSS) allow withdrawals anytime. With ULIPs, your investment remains locked for a full 5-year period, so they don’t work for immediate financial needs.
• Market Outlook Considerations: For 2025, analysts predict continued market volatility. ULIPs may provide more stability during fluctuations while mutual funds could offer better upside during potential rallies. Your view on market direction should influence the choice.

Who Should Consider ULIPs vs Mutual Funds?

Your specific money goals and financial aspirations should guide your decision between ULIPs and mutual funds. Both investment choices have their place but the key is understanding which one fits your specific situation better.

Ideal Candidates for ULIPs:

Young professionals starting their financial journey often benefit most from ULIPs, particularly those who:

• Those who want life insurance and investment returns combined in one plan.
• Take up positions in the top tax brackets (30%+ income brackets) and focus on tax-advantaged investment vehicles.
• Can commit to a minimum 5-year investment horizon without liquidity needs
• Prefer automatic portfolio rebalancing without active management
• Want to enforce long-term savings discipline through lock-in periods

Salaried individuals with stable incomes find ULIPs advantageous because:

• Regular premium payments align well with monthly salary cycles
• The tax savings available through Section 80C can significantly lower your yearly tax bill.
• The insurance component provides family protection during wealth accumulation

Investors Better Served by Mutual Funds:

Mutual funds are a good choice for smart buyers when they:

• Already have adequate life insurance coverage through separate term plans
• Require flexibility to redeem investments based on changing needs
• Hold the financial strength to manage the unavoidable fluctuations in the market.
• Want to tactically allocate across different market segments
• Seek lower cost structures compared to bundled insurance products

Specific investor profiles for mutual funds include:

• Young earners building wealth for medium-term goals (3-7 years)
• Experienced investors who understand market cycles
• Those wanting to create customized portfolios across fund categories
• Investors who may need partial liquidity during the investment period

Conclusion

ULIPs give you that two-in-one combo of insurance and investment, perfect if you like keeping things simple and protected. Mutual funds? They’re your go-to when you want to roll up your sleeves and focus purely on growing your money, market ups and downs included.

In the end, the greatest choice is the one that best suits your comfort level and financial cases. Maybe that’s a ULIP because you value the safety net. Maybe it’s mutual funds because you’re chasing growth. Or, like many smart investors, maybe it’s a mix of both.

Before jumping in, take a hard look at your goals, how much risk you can stomach, and when you’ll need the money. And if you’re still scratching your head? That’s what financial advisors are for: to help translate all this into a plan that actually makes sense for your life.

Maintaining consistent financial discipline for the long term is the best way to go, no matter what you decide.