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4 ULIPs vs Mutual Funds - How 4th Generation ULIP is Better?

Updated On Aug 22, 2023

When you spend long hours making a decent earning, it is necessary to look for suitable financial instruments where you can invest your hard-earned money. In this modern world, investments have become a crucial part of finance management. You can build your wealth with time and expect several tax benefits if you park your money in the right channels.

When you talk about investments and tax benefits, the two most popular investment options that pop up are Unit-Linked Insurance Plans (ULIP) and Mutual Funds (MF). Thousands of individuals throughout the nation are interested in these two exciting investment opportunities. Are you thinking about investing? If you are not too sure about which two options to choose, you should try and understand more about them.

Mutual Funds: What Is It?

A mutual fund is a popular investment option in the country. It pools the money from different investors and utilises it to buy different securities, such as bonds, stocks, and other assets. Professional and experienced fund managers are in charge of managing these funds. These professionals are experts at selecting and managing your investments to give you the most possible returns.

Fund managers use their individual strategies to allocate the pooled funds into diverse portfolios. This helps them mitigate risks and provide maximum returns. The total fund amount is divided into units. Investors hold a part of these units equivalent to their investments.

4 ULIPs vs Mutual Funds

Benefits of Investing In Mutual Funds

You can enjoy several benefits if you invest your hard-earned money in Mutual Funds:

  • Diversification

Mutual Funds offer diversification to investors. If you invest in a mutual fund, your funds are divided among various securities. As a result, it lowers the possibility of risks from investing in a single investment.

  • Managed by Professional Fund Managers

Professional fund managers create the best investments for you by utilising their skills, knowledge, and expertise. Thus, you can expect the best possible returns with time.

  • Provide Liquidity

You have the liberty of buying more or selling your existing units whenever you need money in life. Thus, the liquidity option of mutual funds is a key benefit that you can enjoy.

  • Different Plans

Mutual funds come with different plans. You can choose the plan that fits your goal. Some of the most common plans include growth plans, tax-saving plans, and regular income plans.

Risks Associated With Mutual Funds

Like everything else, mutual funds also have its fair share of cons. The following is a list of some risks associated with mutual fund investment.

  • Return Subject To Market Volatility

Your return on mutual fund investments is subject to market volatility. This implies that depending on the status of the market, the value of your assets may rise or fall.

  • No Guaranteed Returns

Mutual funds do not provide any guaranteed returns compared to many other investing alternatives. In fact, investing in mutual funds does not come with a guarantee of capital appreciation and income distribution.

  • Liquidity Risk

Mutual funds come with liquidity risk. This means that there may be situations wherein you may fail to sell your security to get the money you need.

Unit-Linked Insurance Plans (ULIP)

Unit-Linked Insurance Plans, commonly referred to as ULIPs, are hybrid financial products that serve a dual purpose. They not only provide insurance cover but also give investors the opportunity to invest in various market-linked instruments, aiming for wealth appreciation.

The Evolution of ULIPs

ULIPs have significantly evolved since their inception. The 1st generation ULIPs were fraught with high charges and lacked transparency. Second-generation ULIPs attempted to rectify these drawbacks by reducing some costs and enhancing disclosure standards. The 3rd generation brought in improvements in terms of cost structure, flexibility, and investment choices.

Key Features of 4th Generation ULIPs

  • Lower costs: Improved cost-effectiveness due to regulatory changes.
  • Flexibility: Enhanced flexibility with premium payment and fund-switching options.
  • Transparency: Clear disclosures on charges and returns.
  • Life Cover: Ensures insurance coverage for policyholders.
  • Goal-based Investing: Allows investors to align their investment strategies with specific financial goals.

Benefits of 4th Generation ULIPs

  • Potential for Higher Returns: A portion of the premium is invested in market-linked instruments, allowing for potentially higher returns.
  • Tax Benefits: Provides tax benefits under certain sections of the Income Tax Act.
  • Insurance Coverage: Offers the dual benefit of life insurance along with investment.
  • Long-Term Investment: Encourages long-term financial planning due to a mandatory lock-in period.
  • Fund Switching: Depending on the state of the market, fund switching lets investors choose between equities and debt funds.

Risks Associated with 4th Generation ULIPs

  • Market Risk: The investment portion is subject to market risks, which could lead to capital loss.
  • Lock-in Period: Comes with a lock-in period during which funds cannot be withdrawn, which can impact liquidity.
  • Charges: Despite lower charges than earlier ULIPs, there are still several charges like mortality charges, fund management charges, etc.
  • Dependence on Fund Management: Returns depend on how well the fund is managed, similar to mutual funds.
  • Risk Cover Might Not Be Adequate: The life insurance cover might not be sufficient as a portion of the premium is directed towards investment.

Comparative Analysis: 4th Generation ULIPs vs Mutual Funds

Type of Investment

Mutual Funds primarily serve the purpose of wealth creation and may cater to a range of risk appetites from conservative to aggressive, depending upon the type of mutual fund chosen. On the other hand, 4th Generation ULIPs provide a combination of insurance coverage and investment, allowing investors to both protect and grow their capital. They often provide an array of fund options, ranging from equity to debt, for the investment component.


Both Mutual Funds and ULIPs offer a degree of flexibility. Mutual Funds allow systematic investment and withdrawal, along with a switch between funds. 4th Generation ULIPs provide the flexibility to switch between various fund options without incurring capital gains tax, and they often include options to alter the premium and sum insured.


While Mutual Funds have a high level of transparency with daily Net Asset Value (NAV) updates and detailed portfolio disclosures, 4th Generation ULIPs have improved on transparency over previous versions, providing regular updates about the performance of the chosen fund, allocation of premium, charges, and insurance coverage.


The risks in both Mutual Funds and 4th Generation ULIPs are largely linked to market volatility and the performance of the chosen fund. However, ULIPs provide an added layer of protection with their insurance component, partially mitigating potential losses.


Mutual Funds, especially open-ended ones, generally offer better liquidity with the option to redeem units at any time. In contrast, ULIPs come with a lock-in period, typically of 5 years, limiting immediate liquidity. However, 4th Generation ULIPs have sought to reduce this limitation by offering partial withdrawal options after the lock-in period.

How 4th Generation ULIP Is Better Than Mutual Funds?

4th Generation ULIPs offer a dual benefit of insurance coverage and investment plan, unlike Mutual Funds, which focus solely on investment. They provide tax benefits, flexibility to switch funds without incurring capital gains tax, and improved transparency. Although they have a lock-in period, ULIPs allow partial withdrawals post this period, enhancing liquidity. Thus, they can provide a comprehensive financial solution, making them a potentially better choice for certain investors.


The choice between 4th Generation ULIPs and Mutual Funds should hinge on an individual's specific financial objectives, risk tolerance, and need for insurance coverage. While mutual funds primarily focus on wealth creation, ULIPs offer an integrated solution for insurance and investment. It's crucial for investors to thoroughly evaluate each option's features and implications, consider their financial situation and goals, and seek professional advice if necessary. Always remember personal finance is highly individualistic.


What is the primary difference between 4th Generation ULIPs and Mutual Funds?

The main difference lies in their purpose. Mutual Funds are purely investment products aiming at wealth creation. On the other hand, 4th Generation ULIPs are hybrid products that offer a combination of insurance and investment. They allow policyholders to invest in various fund options while also providing life coverage.

Are 4th Generation ULIPs more cost-effective than Mutual Funds?

The cost-effectiveness depends on various factors. While Mutual Funds have a relatively transparent cost structure with a stated expense ratio, 4th Generation ULIPs have made strides in cost reduction and transparency, with many plans offering low or no premium allocation and policy administration charges. The overall cost-effectiveness will depend on the specific ULIP and Mutual Fund chosen, as well as the investor's time horizon.

Which provides better liquidity: 4th Generation ULIPs or Mutual Funds?

Typically, Mutual Funds offer better liquidity as they allow the redemption of units at any time. ULIPs have a lock-in period, usually 5 years. However, 4th Generation ULIPs offer the option of partial withdrawals after the lock-in period, which can improve their liquidity.

How does the risk profile compare between 4th Generation ULIPs and Mutual Funds?

The risk in both cases largely depends on the market performance of the chosen fund. However, 4th Generation ULIPs offer an added layer of protection with their life insurance component.

Do 4th Generation ULIPs offer the same level of transparency as Mutual Funds?

Mutual Funds are known for their high transparency, with regular NAV updates and portfolio disclosures. 4th Generation ULIPs have improved transparency, providing regular updates on fund performance, premium allocation, charges, and insurance coverage, thereby making them comparable to Mutual Funds.


This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.