ULIPs or Mutual Funds: Comparing long-term returns and savings over 20 years

When it comes to building wealth over time, investors often find themselves comparing two popular financial instruments — Unit Linked Insurance Plans (ULIPs) and Mutual Funds. Both help in growing your money through market-linked returns, but their structure, benefits, and tax implications are quite different. While mutual funds focus purely on investment, ULIPs offer a combination of investment and life insurance coverage, making them a dual-purpose financial product.

Earlier, ULIPs were not very popular because of their high costs and complex structure. However, recent reforms by the Insurance Regulatory and Development Authority of India (IRDAI) and the introduction of digital-first ULIPs have made them more cost-efficient and transparent. Today, they are seen as competitive investment options that not only provide returns but also ensure financial security for your family.

Investment and insurance in one plan

Mutual funds are straightforward investment products where you invest in equity, debt, or hybrid funds based on your financial goals and risk tolerance. Their value depends entirely on market performance, and they do not provide any life insurance cover.

On the other hand, ULIPs (Unit Linked Insurance Plans) combine investment and insurance benefits. A portion of your premium goes towards life insurance, and the remaining amount is invested in market-linked funds like equity or debt. This ensures that even if the market performs poorly, your family is financially protected through the sum assured, which is the guaranteed minimum benefit under the policy.

ULIPs also offer a Waiver of Premium option, which is an additional advantage. In case of the policyholder’s unfortunate death, the insurer continues to pay future premiums so that the financial goals of the family — such as a child’s education or future savings — are not affected. This makes ULIPs more comprehensive for long-term planning compared to mutual funds, which only provide investment growth without protection.

Another benefit of ULIPs is fund-switching flexibility. Investors can switch between equity, debt, or balanced funds depending on market trends or risk appetite, without any tax liability. This flexibility allows better control over your investments compared to mutual funds, where fund switches may have tax implications.

Tax benefits and long-term returns

Tax advantages make ULIPs stand out among other investment options. Under Section 80C of the Income Tax Act, investors can claim a deduction of up to Rs 1.5 lakh per year on the premiums paid for ULIPs. This helps reduce overall taxable income. Moreover, under Section 10(10D), the maturity proceeds and death benefits from ULIPs are completely tax-free, provided the annual premium does not exceed Rs 2.5 lakh.

Mutual funds, on the other hand, are subject to Long-Term Capital Gains (LTCG) tax of 10% on profits exceeding Rs 1 lakh per year. This can slightly reduce your overall returns in the long run. In contrast, the entire return from ULIPs is exempt from LTCG, making them more attractive for long-term investors who prefer tax efficiency.

The recent GST 2.0 reform in September 2025 has further improved the appeal of ULIPs by removing GST on life insurance products. This means that investors now pay no indirect tax on their premiums, making ULIPs one of the few instruments in India offering zero tax outlay — both direct and indirect.

According to Pavit Laul, Head of Investments at Policybazaar.com, modern ULIPs have become an excellent choice for investors. “Online ULIPs now combine insurance protection and wealth creation at a very low cost. They provide tax benefits under Section 80C and tax-free maturity under Section 10(10D), and the scrapping of GST has made them even more efficient,” he said. Laul added that the flexibility of switching between funds and the inclusion of features like the waiver of premium make ULIPs a powerful long-term financial planning tool.

How much can you save in 20 years?

To understand the difference between ULIPs and mutual funds in terms of returns, let’s look at a hypothetical comparison based on a 30-year-old male investor saving Rs 10,000 per month for 10 years, with a policy or investment term of 20 years.

• Investor A (Mutual Fund):
  Suppose Investor A chooses a direct mutual fund offering an average annual return of 15%, with a fund management cost (FMC) of 0.55%. After 20 years, the investment grows to approximately Rs 84.24 lakh, after applying a 10% LTCG tax on the gains.

• Investor B (ULIP):
  Now, if Investor B invests the same Rs 10,000 per month in a ULIP (Axis Max Online Savings Plan) with a 15% return and a fund management cost of 1.25%, the payout after 20 years would be around Rs 86.49 lakh. The best part — this payout is completely tax-free, since ULIPs offer tax-free maturity benefits.

Although mutual funds have a slightly lower expense ratio, the tax-free advantage of ULIPs ensures that the net return remains higher in the long run. Moreover, the insurance protection included in ULIPs provides an additional layer of financial security that mutual funds do not offer.

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Choosing what suits you best

When deciding between ULIPs and mutual funds, investors should consider their financial goals, risk appetite, and investment horizon. Mutual funds are ideal for those who seek flexibility, short-term liquidity, and pure market-based growth. ULIPs, however, are better suited for those who want long-term wealth creation with life cover and tax savings.

In the past, high charges made ULIPs less appealing, but the new-age online ULIPs have changed that perception. With low costs, zero GST, and multiple tax benefits, ULIPs are now competitive with mutual funds in terms of returns, while offering the additional advantage of life insurance and stability.

In short, both options can help you build wealth, but if you are planning for long-term goals such as retirement, child education, or home purchase, a ULIP may offer a more complete and tax-efficient solution — ensuring both financial growth and family protection over time.