With multiple investment options available today, picking one that fits your needs could be difficult. Many people prefer investing in mutual funds, while many investors choose to put their money in Unit-Linked Insurance Plans (ULIPs). You will have to consider your risk profile and long-term goals before you make any decision. It helps to understand the purpose that both investment products serve.

To understand the working of ULIPs, you need to know the ULIP meaning first. ULIP offers a dual benefit of insurance and investment. You pay a premium to remain invested in this plan. In contrast, mutual funds are only an investment instrument, wherein the fund manager invests the amount in a particular fund. However, if you want to decide which option is the best for you, you need to understand the differences between the two investment avenues and choose one that will help you achieve your financial goals. You can do a thorough comparison based on the following parameters:

• Liquidity

You need to consider the amount of liquidity that both investment products offer. Mutual funds can offer high liquidity; they allow you towithdraw money as and when required. Keep in mind that mutual funds have a lock-in period, and if you withdraw your investments during this tenure, you have to pay an exit load, as applicable.

A ULIP policy comes with a lock-in period of five years, and you can make partial withdrawals at the end of this tenure. In case of early termination of the policy, you have to pay surrender charges.

• Risk

If you compare the risk between the two products, ULIP is less risky as compared to mutual funds. Your ULIP premium will be invested in funds that fit your risk appetite. This will ensure the protection of your investments.

In contrast, the risk in a mutual fund will vary from low to high based on the market movement.

• Flexibility

You have to follow the pre-determined structure in mutual funds. You need to remain invested until the end of the plan. Switching funds is not possible in mutual funds.

You can switch funds in a ULIP policy based on the market movement.

• Tax benefits

Any premium paid towards ULIP is deductible from tax as per Section 80C of the Income Tax Act, 1961. You can claim a maximum amount of INR 1.5 lakh in a year as a deduction. In mutual funds, you only get a tax deduction in case of equity-linked saving schemes for long-term capital gains up to INR 1 lakh. Tax exemption is a huge reason behind the popularity of ULIPs among investors.

• Additional protection

A mutual fund is a plain investment product with no riders associated with it. In a ULIP, you enjoy additional protection by choosing riders that work best for you. You can enhance the ULIP insurance cover with riders that are available on your policy. It is an ideal option for those who are saving for a specific purpose like children’s education or retirement. Some products offer a lump sum in case the policyholder passes away. In addition, many products have a regular payout plan.

There is no such benefit associated with a mutual fund. After you choose a fund and invest in it, you cannot avail of any extra benefits. In a ULIP, the option to include riders is always open, and you can enjoy enhanced protection and security by paying an additional amount.

Both investment options have their advantages and disadvantages. You need to carefully choose an investment option that helps you build your wealth and takes you closer to the long-term financial goals.

Understand the differences between the two products and consider your risk appetite before you make an investment decision. ULIPs have the edge over mutual funds if you are looking for an ideal investment avenue, which offers the facility of switching funds as per the market conditions along with other advantages, like life insurance coverage and tax-free returns.