Difference Between ULIP and Mutual funds

ULIP vs Mutual funds

By concept, there is only a small difference between ULIP schemes and a Mutual fund scheme, in terms of product structure, excluding risk coverage. They are both market linked for returns, and they will both carry market risk. Based on the investor’s selected stock performance, his returns will reflect exactly that in both cases. For both options, a fund manager will be responsible for running the scheme. That is all as far as the similarities are concerned, i.e. the product structure. There are significant variations in the way the two products are managed, and, on an important note, regulated.

Differences
Regarding regulation, Mutual Funds are regulated by the SEBI, while ULIPs are regulated by the IRDA. From an industrial point of view, while Mutual Funds focus on low costs and better performance as the USP, ULIP looks more at distribution reach as the USP.

Generally, agents who ‘distribute the numerous AMC products’ are the ones that sell Mutual Funds, whereas the agents who are attached to a single insurance company are the ones that sell Insurance (excluding insurance brokers who are much fewer than attached agents). This is a very important consideration, as there’s a tendency for tied agents to be well acquainted, and champion only the products that his principal insurance company sells, whereas a Mutual Fund agent, who is mostly unattached, will be more performance driven when selecting a fund, given his fees are wholly dependent on investor satisfaction.

Mutual Funds have very stringent transparency requirements compared to ULIPs, but this also ensures that the investor is availed as much information as necessary, unlike with ULIPs. Things like Portfolio disclosure and Daily NAV are better followed with Mutual Funds.

In terms of flexibility, a ULIP will allow you to increase your life cover while keeping your premium the same. This is achieved by reducing your investment allocation. However, if you have a term policy purchased on top of a Mutual Fund, you cannot increase your life cover. You would only have the option of purchasing a new policy, thus incurring new administration costs again.

In terms of costs of insurance, typically investing in a Mutual Fund will cost you less than it will cost for a general ULIP scheme. But in a nutshell, ULIP products are better suited for long term investment bundled with insurance cover, whereas Mutual Funds are better suited for those that solely focus on investment and medium-term returns.

Summary:
Mutual Funds are regulated by the SEBI, while ULIPs are regulated by the IRDA.
Mutual Funds are sold by un-tied agents, while ULIPs are sold by tied agents attached to one particular insurer.
Mutual funds have stricter transparency requirements than ULIPs.
ULIPs are more flexible than MFs, as they allow you to increase your life cover while the premium remains the same; unlike ULIPs, where you have to buy a new policy altogether.

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