The biggest difference lies in the fact that mutual funds do not offer a life

cover; only ULIPs do. This is the money the insurance company promises
your family in case of an untimely death.

Additional Protection in ULIPs

There are certain ULIP products in the market that offer an additional
protection element through riders or inbuilt benefits. These types of ULIP
products would best suit customers who are saving for a specific need and
are worried that these needs might not be met in case they are not around in
the future.

Tax-savings

ULIPs allow you tax deductions, as per Section 80C of the Income Tax Act.
Whatever money you invest in a ULIP is deducted from your total taxable
income. This then reduces the money you owe to the government as income
tax. Mutual funds, on the other hand, do not always help you reduce taxes.
Only ELSS or Equity-Linked Saving Schemes give you such tax deductions.
ULIPs:

1. Allocation charges – Ranges between 2- 5 per cent annually

2. Policy Administration charges – anywhere between Rs 700 – 1,000 per annum.
3. Mortality charges – ranges from 1 to 12 per thousand sum insured. ( which is very high in
higher age groups) .
4. Can not be withdrawn before five years .
5. Discontinuation charges before five years , ranging between 2- 6 per cent
6. They avail a benefit of tax free maturity under section 10(10)d.
 They have free switches without paying any taxes short term gain / long term gains
7. It is only beneficial if you want it for at least 10 years +
8. You are bound with one fund house and its performance , can't move out

Mutual Fund:

1. No Allocation Charges . 100 per cent invested in markets

2. No Administration charges
3. No Mortality charges
4. Flexible, as you can redeem at any time subject to capital gain and exit load before one year .
5. LTCG 10 per cent and STCG 15 per cent
6. Switch is counted as redemption and is subject to capital gains
7. It is beneficial and beats ULIPs in short term of 5 to 6 years .
8. You can have multiple options and you can change funds if its not performing.
In long term even after paying long term capital gains in mutual funds , the returns come out the same . At
the end of 10 years, the mutual fund would make around Rs 1.75 crore. After paying a long term capital
gains tax of 10 per cent, you will have a net return of Rs 1.67 core. The ULIP would offer slightly better
return of Rs 1.69 crore. (See Table)

For this we have taken an example of one of the insurance company and one mutual fund , giving out
same returns of 12 per cent for 10 years .
Liquidity
Liquidity is a very important criteria for selecting an investment
product while doing financial planning, as if you can’t liquidate your
investments when you need then that investment is of no use. Equity
mutual funds are highly liquid, a person can redeem his units any
time. On the other hand, a person can’t withdraw his money from
ULIPs before 5 years since there is a 5 years lock-in period.

Flexibility
Mutual funds are way more flexible than ULIPs. Mutual fund
investors can switch from one scheme to another within a fund
house or to another fund house, which enables investors to switch
from poor performing schemes to better ones. On the other hand,
ULIPs provide some flexibility to investors to switch from equity to
debt and vice-versa within the insurance house only. So, if a fund
manager of a ULIP joins another insurance company, the investor
can’t switch to new insurance company, whereas it possible in mutual
funds.

Transparency
Indian mutual fund industry is one of the most highly regulated and
transparent industries in the world. The returns, portfolios and sector
allocation of mutual funds are available on AMC and various other
websites. The benchmark, expense ratio and exit load is also
disclosed by AMCs and is available on various websites. Besides,
many analysts and investment advisors track mutual funds. ULIPs
also disclose same information but they are not widely tracked by
the analyst community.

Cost
ULIPs used to have very high charges in past but now they compete
with mutual fund schemes on charges. If a person invests in a ULIP
via online, he does not have to pay administrative or fund allocation
charges. Mutual fund schemes also have very competing expense
ratios. Investors can further reduce the expense ratios by investing in
direct plans.

Taxability
ULIPs are always more tax efficient than mutual funds. Capital gains
from the ULIP are tax free, whether it is equity or debt. Whereas,
investors have to pay 15% tax on short term capital gains and 10%
tax on long term capital gains (from April 1, 2018) from equity
mutual funds. The short term gains from the debt funds are taxed at
marginal rate, while long term capital gains are taxed at 20% after
indexation.

Conclusion
ULIPs are always more tax efficient than mutual funds, but the recent
introduction of 10% LTCG tax from equity investments has given
them more advent. However, you don’t select an investment product
based on one criteria. Mutual funds outscore ULIPs on other
parameters like returns, transparency, liquidity and flexibility.
difference between ULIPs and Bank Fixed Deposits can be summed as: ULIP Bank Fixed Deposits
Nature of Returns Market Related Fixed Expected rate of returns High Moderate Tax Benefits
Premium Tax Free till Rs.1,00,000 p.a. U/S 80C Maturity amount tax free U/S 10(10)D Premium Tax
Free till Rs.1,00,000 p.a. U/S 80C if FD>= 5 years and not otherwise Maturity interest amount is
taxable. Flexibility Partial Withdrawal: Option to withdraw money partially Switching: Change asset
class according to market performance expectation and reap maximum benefits Loan: Can avail
loan upto 40% of the Fund value Top Up: Pay additional premium in the same policy without having
to purchase another investment tool Partial Withdrawal: Not allowed in Bank Fixed Deposits
Switching: Not allowed in Bank Fixed Deposits Loan: can avail loan upto 75-90% of the maturity
amount Top Up: Not allowed in Bank Fixed Deposits Risk Level High Low Tenure of investment
Long Term Short Term What kind of investor should buy this? Risk Lover Risk Averter Choice of
Investment Can choose from the available funds Fixed. Life Cover Available of minimum 10 times
the premium amount Not available in Bank Fixed Deposits

Read more at: http://www.sify.com/finance/how-are-unit-linked-insurance-plans-ulips-better-than-

bank-fixed-deposits-news-insurance-miorGIedhcfsi.html
ULIP Bank Fixed Deposits Nature of Returns Market Related Fixed Expected rate of returns High
Moderate Tax Benefits Premium Tax Free till Rs.1,00,000 p.a. U/S 80C Maturity amount tax free U/S
10(10)D Premium Tax Free till Rs.1,00,000 p.a. U/S 80C if FD>= 5 years and not otherwise Maturity
interest amount is taxable. Flexibility Partial Withdrawal: Option to withdraw money partially
Switching: Change asset class according to market performance expectation and reap maximum
benefits Loan: Can avail loan upto 40% of the Fund value Top Up: Pay additional premium in the
same policy without having to purchase another investment tool Partial Withdrawal: Not allowed in
Bank Fixed Deposits Switching: Not allowed in Bank Fixed Deposits Loan: can avail loan upto 75-90%
of the maturity amount Top Up: Not allowed in Bank Fixed Deposits Risk Level High Low Tenure of
investment Long Term Short Term What kind of investor should buy this? Risk Lover Risk Averter
Choice of Investment Can choose from the available funds Fixed. Life Cover Available of minimum
10 times the premium amount Not available in Bank Fixed Deposits

Read more at: http://www.sify.com/finance/how-are-unit-linked-insurance-plans-ulips-better-than-

bank-fixed-deposits-news-insurance-miorGIedhcfsi.html