A client in Dubai once told me he bought a ULIP on his agent's advice because it offered "insurance plus investment in one plan."
Five years later, when he tried to calculate his actual returns, he realised nearly 15% of his premium had vanished into various charges he never understood.
This story repeats itself across our WhatsApp community of NRIs. Many have invested in ULIPs without fully grasping the fee structure. Others have avoided mutual funds thinking they are "too risky" for NRIs.
At Belong, we help NRIs compare investment options with complete transparency. This guide breaks down everything you need to know about mutual funds vs ULIPs, so you can choose based on facts, not sales pitches.
What are Mutual Funds?
A mutual fund pools money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. Professional fund managers at Asset Management Companies (AMCs) handle all investment decisions on your behalf.
For NRIs, mutual funds have become a preferred way to invest in India without managing individual stocks. You can start with as little as ₹500 per month through a SIP (Systematic Investment Plan).
The Securities and Exchange Board of India (SEBI) regulates all mutual funds, ensuring transparency in fees, performance disclosure, and investor protection.
There are different types of mutual funds based on what they invest in: equity funds (stocks), debt funds (bonds), hybrid funds (mix of both), and more. You can explore options using our Mutual Funds Explorer.
What are ULIPs?
A Unit Linked Insurance Plan (ULIP) combines life insurance with market-linked investment in a single product. Part of your premium goes toward life cover, and the rest is invested in equity, debt, or hybrid funds of your choice.
The Insurance Regulatory and Development Authority of India (IRDAI) regulates ULIPs. They come with a mandatory 5-year lock-in period, meaning you cannot withdraw your money before completing five years.
ULIPs were originally designed for people who wanted both insurance and investment in one product. But over the years, the hidden charges and complexity have made them less attractive compared to keeping insurance and investment separate.
👉 Tip: Financial experts recommend keeping insurance and investments separate. Buy a pure term plan for protection and invest separately in mutual funds for wealth creation.
Why This Comparison Matters for NRIs
When we surveyed our community members about their preference between mutual funds and ULIPs, the result was striking. 100% preferred mutual funds. Even more telling, 50% of those who had purchased ULIPs in the past felt they had been mis-sold by agents (iNRI Survey, 2024).
The mis-selling happens because agents earn significantly higher commissions on ULIPs than on mutual funds. This creates a conflict of interest where the product recommended may not be the best for you.
As an NRI, you need to understand the key differences before making a choice.
Charges: Where ULIPs Lose the Battle
This is where the real difference becomes clear. Let's look at what you actually pay.
ULIP Charges
ULIPs have multiple layers of fees that eat into your returns:
Charge Type | Typical Range | Description |
|---|---|---|
Premium Allocation | 0% to 3.5% | Deducted upfront from each premium |
Fund Management | Up to 1.35% p.a. | For managing your investments |
Mortality Charge | Varies by age | Cost of providing life cover |
Policy Administration | ₹300-500/month | Monthly maintenance fee |
Surrender Charge | Up to 5% | If you exit during lock-in period |
Source: HDFC Life, Bajaj Allianz
The mortality charge increases with age. If you buy a ULIP at 30, your mortality charge might be ₹127 per month. But at 45, this can increase significantly (ICICI Prudential).
Mutual Fund Charges
Mutual funds have a much simpler fee structure:
Charge Type | Maximum Limit | Notes |
|---|---|---|
Total Expense Ratio (TER) | Up to 2.25% for equity, lower for larger funds | Includes all fees |
Exit Load | 0-1% (if redeemed within 1 year) | Many funds have no exit load after 1 year |
SEBI has capped the expense ratio and mandates complete transparency. You can see exactly what you are paying before you invest (SEBI Mutual Fund Regulations).
For direct mutual funds (where you invest without a distributor), the expense ratio can be as low as 0.1% for index funds.
👉 Tip: When comparing products, always calculate the total cost over your investment horizon. A 1% difference in annual charges can reduce your final corpus by 15-20% over 20 years.
Returns: Which Gives Better Growth?
Both ULIPs and mutual funds are market-linked, meaning returns depend on market performance. But here is where mutual funds typically have an edge.
In ULIPs, a portion of your premium goes toward insurance and various charges before being invested. In mutual funds, nearly 100% of your investment goes into the market after deducting the expense ratio.
Let us illustrate with an example:
Investment: ₹1,00,000 per year for 10 years
Factor | ULIP | Mutual Fund |
|---|---|---|
Amount actually invested (after charges) | ₹85,000-90,000 | ₹98,000-99,000 |
Fund management charge | 1.35% p.a. | 0.5-1.5% p.a. |
Additional insurance-related deductions | Yes | No |
Over time, these differences compound. Many studies show that mutual funds tend to deliver higher returns than ULIPs when invested in similar asset classes, primarily because more of your money is working in the market.
For NRIs looking to build wealth systematically, mutual funds offer a cleaner path to growth.
Liquidity: When Can You Access Your Money?
This is another critical difference.
ULIPs
ULIPs come with a mandatory 5-year lock-in period. You cannot withdraw your money during this time without facing surrender charges and losing tax benefits.
If you stop paying premiums during the lock-in, your funds move to a "Discontinuance Fund" with limited growth potential, and you only get the money after completing 5 years.
Mutual Funds
Most mutual funds (except ELSS) have no lock-in period. You can redeem your investment any time. Some funds have an exit load of 1% if you redeem within the first year, but after that, withdrawals are usually free.
ELSS funds (Equity Linked Savings Schemes) have a 3-year lock-in but offer tax deduction under Section 80C.
👉 Tip: As an NRI, liquidity matters. Job changes, family emergencies, or return-to-India plans can happen unexpectedly. Mutual funds give you the flexibility to access your money when needed.
Tax Implications for NRIs: 2024-2025 Rules
Tax treatment is where things get interesting, and the 2024 Budget brought major changes.
Mutual Fund Taxation for NRIs
After the July 2024 Budget changes:
Equity Mutual Funds:
- Short-term capital gains (held less than 12 months): 20% tax + surcharge + 4% cess
- Long-term capital gains (held more than 12 months): 12.5% tax on gains exceeding ₹1.25 lakh
Debt Mutual Funds:
- All gains (regardless of holding period): Taxed at your income slab rate
- No indexation benefit available
TDS is deducted at source for NRIs. For equity funds, TDS is 12.5% for long-term gains and 20% for short-term gains (Bajaj Finserv).
You can learn more about NRI mutual fund taxation on our detailed guide.
ULIP Taxation for NRIs
ULIPs can be tax-free under Section 10(10D) if:
- Annual premium does not exceed ₹2.5 lakh (for policies issued after Feb 1, 2021)
- Premium does not exceed 10% of sum assured
If these conditions are not met, ULIP gains are now taxed as capital gains, similar to mutual funds (Kotak Life).
Budget 2025 Update: Policies bought from IFSC (GIFT City) offices now enjoy Section 10(10D) exemption without the ₹2.5 lakh premium limit (Business Today).
The DTAA Advantage
UAE does not have personal income tax. Under the India-UAE Double Taxation Avoidance Agreement (DTAA), you only pay tax in India, and there is no double taxation.
You can also explore GIFT City mutual funds, which offer zero capital gains tax for NRIs, making them a powerful alternative.
Insurance Component: Do You Really Need It?
ULIPs provide life insurance as part of the package. But here is the question: Is bundled insurance the best way to protect your family?
The sum assured in ULIPs is typically 10 times the annual premium (to qualify for tax benefits). If you pay ₹1 lakh annual premium, your life cover is just ₹10 lakh. Is that enough to secure your family?
A separate term insurance plan can give you ₹1 crore cover for ₹15,000-20,000 annual premium. That is 10 times more coverage at a fraction of the cost.
By keeping insurance separate from investments:
- You get higher life cover at lower cost
- Your investment grows without insurance-related deductions
- You have flexibility to modify either component independently
👉 Tip: Calculate your actual insurance needs (typically 10-15 times annual income). Then buy a term plan for that amount. Invest the remaining savings in mutual funds.
Transparency and Regulation
Mutual Funds:
- SEBI mandates disclosure of expense ratios separately for direct and regular plans
- Portfolio holdings are disclosed monthly on AMC websites
- Returns must be presented in standardized format
- NAV (Net Asset Value) is published daily
ULIPs:
- Charges are disclosed in policy documents but can be complex
- Multiple charge types make total cost calculation difficult
- Fund switches and performance tracking vary by insurer
When we built Belong's NRI FD Comparison Tool, transparency was our top priority. The same principle should guide your investment choices.
When Should an NRI Choose Mutual Funds?
Mutual funds are typically better if:
- You want higher returns: More of your money works in the market
- You need liquidity: No mandatory lock-in (except ELSS)
- You already have adequate life insurance: A term plan covers your protection needs
- You want flexibility: Wide range of fund types, easy switching
- You prefer transparency: Clear, regulated fee structure
- You have short to medium-term goals: Access money when needed
For NRIs who want to start SIP investments, mutual funds offer the simplest path.
When Might ULIPs Make Sense?
ULIPs could work if:
- You want forced discipline: The 5-year lock-in prevents impulsive withdrawals
- You do not have any life insurance: Though buying separate term insurance is usually better
- Your annual premium is under ₹2.5 lakh: To retain tax-free maturity benefits
- You plan to stay invested for 15+ years: Charges reduce over longer horizons
- You prefer a single product: Though this convenience comes at a cost
Even in these cases, we generally recommend keeping insurance and investment separate.
GIFT City: A Tax-Free Alternative for NRIs
Before you finalize between ULIPs and regular mutual funds, consider GIFT City investments.
GIFT City (Gujarat International Finance Tec-City) is India's first International Financial Services Centre. For NRIs, it offers:
- Zero capital gains tax on GIFT City mutual funds
- USD-denominated investments protecting against rupee depreciation
- Simplified repatriation back to your overseas accounts
- World-class regulatory framework under IFSCA
You can explore GIFT City mutual funds and GIFT City USD fixed deposits through our platform.
If tax efficiency is your priority, GIFT City funds often outperform both regular mutual funds and ULIPs on a post-tax basis.
👉 Tip: Use our Rupee vs Dollar Tracker to understand currency trends before deciding between INR and USD investments.
How to Invest in Mutual Funds as an NRI
If you have decided mutual funds are right for you, here is how to get started:
Complete KYC: You need PAN card and KYC verification. Our NRI KYC guide explains the process.
Choose Account Type: Investments can be linked to NRE (repatriable) or NRO (non-repatriable) accounts. Understand the NRE vs NRO difference.
Select Funds: Based on your goals and risk tolerance. Check our guide on choosing the right mutual fund.
Start Investing: You can invest via Belong's platform with:
- No capital gains tax for NRIs
- No NRE/NRO account needed
- Start with just $500
What About 4G ULIPs?
You may have heard about "4G ULIPs" or "new generation ULIPs" that offer lower charges and more flexibility. While these are improvements over traditional ULIPs, they still carry:
- Mortality charges that increase with age
- Lock-in periods
- Less transparency than mutual funds
- Lower net returns due to insurance component
Even with improvements, the fundamental structure of ULIPs makes them less suitable for pure wealth creation compared to mutual funds.
The Verdict: Mutual Funds Win for Most NRIs
After helping thousands of NRIs with their investment decisions, here is what we consistently observe:
Mutual funds are better for:
- Wealth creation
- Flexibility and liquidity
- Transparency in fees
- Higher net returns
Keep insurance separate:
- Buy a term plan for adequate life cover
- It costs much less than ULIP mortality charges
- Provides 10-20 times more coverage
The only scenario where ULIPs might work is if you genuinely need forced discipline and do not trust yourself to stay invested. But even then, an ELSS fund with 3-year lock-in might be a better choice.
Conclusion: Make an Informed Choice
The mutual funds vs ULIPs debate has a clear winner for most NRIs. Mutual funds offer better returns, more flexibility, lower costs, and greater transparency.
If you are an NRI looking to build wealth in India, start by understanding your options clearly. Use our Residential Status Calculator to confirm your tax status. Then explore safe investment options for NRIs.
Join our WhatsApp community where many NRIs discuss investment strategies, share experiences, and get answers to their financial questions: Join Here
Download the Belong app to compare FD rates, explore GIFT City investments, and start your investment journey: Download Belong
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