Charges in Mutual Fund vs ULIP

Get a clear breakdown of charges in mutual funds vs ULIPs, from expense ratios to management fees, and find out which option suits your investment strategy.
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3 mins read
13-January-2026

When it comes to growing your money, two options often come up: mutual funds and Unit Linked Insurance Plans (ULIPs). Both can help you build wealth over time, but their charges work very differently and that can directly affect how much you earn. Many investors focus only on returns, overlooking costs like expense ratios, exit loads, or mortality charges. Let us break down charges in mutual fund vs ULIP in simple terms, so you can pick the one that suits your goals without unpleasant surprises.

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What are mutual fund charges?

Mutual fund charges are the costs incurred for managing, operating, and administering a mutual fund scheme. These charges are not paid separately by investors; instead, they are adjusted against the fund’s assets, which means they directly affect the returns you earn over time.

The most common mutual fund charge is the expense ratio, which covers fund management fees, administrative expenses, and distribution costs. A higher expense ratio reduces the fund’s net returns, especially in long-term investments. Another important charge is the exit load, which is applied when investors redeem their units before a specified holding period, mainly to discourage early withdrawals.

While entry loads are no longer applicable for most mutual funds in India, investors may still encounter transaction charges on certain investments. Additionally, taxes such as capital gains tax and securities transaction tax (STT), though not charged by the fund house, also impact the final returns. Understanding these charges helps investors compare schemes effectively and make more informed investment decisions.

Types of charges in mutual funds

Mutual funds come with various charges that impact overall returns:

  • Expense ratio: This is the annual fee charged by the mutual fund company to manage the fund. It typically ranges from 0.5% to 2.5%.
  • Entry load: Although phased out in many cases, some funds may still impose this charge at the time of purchase.
  • Exit load: A fee applicable if you redeem the fund within a specified period, typically 1% of the investment.
  • Transaction fees: Some funds may charge a fee for certain services, such as switching between funds.

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What are ULIP charges?

ULIP charges are the costs associated with managing, administering, and providing insurance coverage under a Unit Linked Insurance Plan (ULIP). These charges are deducted either from your premium or from the fund value over the policy tenure and directly influence the returns you eventually receive. Since ULIPs combine insurance and investment, the charges cover both components.

Typically, ULIP charges include premium allocation charges deducted upfront, policy administration charges for maintaining the policy, fund management charges for managing your investments, and mortality charges for providing life cover. Some ULIPs may also have fund switching charges if you move money between equity and debt funds beyond the free limits, along with surrender or discontinuance charges if the policy is exited early.

Understanding ULIP charges is important because even small differences can significantly impact long-term wealth creation. Evaluating these charges alongside policy tenure, fund performance, and insurance coverage helps in choosing a ULIP that aligns with your financial and protection goals.

Types of charges in ULIPs

ULIPs have more complex charge structures, including:

  • Premium allocation charge: A percentage of the premium deducted upfront before investing.
  • Fund management charges: An annual fee for managing your investment, capped at 1.35% by the IRDAI.
  • Mortality charges: Deducted for providing life cover, varying based on the insured's age and health.
  • Policy administration charges: Monthly fees to manage the ULIP policy.
  • Surrender charges: Applicable if you terminate the ULIP early, especially within the lock-in period.
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Mutual funds vs. ULIPs – charges breakdown

Charges Mutual Funds ULIPs
Entry/Exit Load Exit load if redeemed early Not applicable
Fund Management Fees 0.5% to 2.5% Capped at 1.35% by IRDAI
Mortality Charges Not applicable Charged based on life cover
Premium Allocation Not applicable Deducted upfront from each premium


To learn more, visit ULIP vs Mutual Fund.

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Impact of charges on investment returns

  • Mutual funds: High expense ratios reduce net returns. Lower fees result in higher profits for investors.
  • ULIPs: Multiple charges (mortality, policy, and fund management) reduce the amount available for investment, impacting long-term returns.
  • Overall: The more the charges, the less the net return, so lower fees are preferable for long-term wealth creation.

Tax benefits and costs in mutual funds and ULIPs

  • Mutual funds: Charges like expense ratios reduce taxable returns. Equity mutual funds provide tax benefits under Section 80C (ELSS funds) and offer capital gains tax exemptions if held for over one year.
  • ULIPs: Maturity proceeds and death benefits from ULIPs are tax-exempt under Section 10(10D) if conditions are met. Premium payments qualify for deductions under Section 80C.

Which is more cost-effective: mutual funds or ULIPs?

When comparing cost-effectiveness, mutual funds generally have lower charges than ULIPs. Mutual funds charge only the expense ratio and exit load, while ULIPs have additional charges like mortality, fund management, and policy administration. Mutual funds also offer better liquidity and flexibility compared to ULIPs. However, ULIPs may be more suitable for those seeking life insurance along with investments.

1. Hidden charges: what to watch out for

While mutual funds are generally transparent about their expense ratios, some ULIPs may include hidden charges like fund switching fees or policy administration charges. It’s important to carefully read the policy terms to understand the full range of charges before investing. Mutual funds, especially those with a low expense ratio, are generally considered more transparent with fewer hidden costs.

2. Regulatory aspects

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which ensures transparency and caps expense ratios. ULIPs are regulated by the Insurance Regulatory and Development Authority of India (IRDAI), which oversees insurance-related charges and mandates maximum fund management charges. Both regulatory bodies ensure that investor interests are protected through stringent guidelines on charges and disclosures.

3. Mutual fund vs. ULIP – which one to choose based on charges?

For investors focused on cost efficiency and liquidity, mutual funds are generally the better option. With lower charges, higher transparency, and no lock-in periods (except for tax-saving ELSS funds), mutual funds offer better flexibility. ULIPs, on the other hand, suit investors who require life insurance coverage alongside their investments, though they come with higher charges and a mandatory five-year lock-in period. Investors should assess their financial goals and priorities when choosing between the two.

Conclusion

Understanding charges in mutual fund vs ULIP is essential before investing. Mutual funds typically provide lower costs, better liquidity, and higher transparency—ideal for most investors. ULIPs work best if you’re looking for life insurance alongside long-term investments, but they involve higher charges and a five-year lock-in. Choose the option that aligns with your goals, risk appetite, and cash flow needs.

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Frequently asked questions

Are ULIP charges higher than mutual fund charges?
Yes, ULIP charges are generally higher than mutual fund charges. ULIPs have additional costs such as premium allocation, fund management, and mortality charges, whereas mutual funds primarily charge an expense ratio for fund management.

How does the expense ratio impact my mutual fund returns?
The expense ratio directly reduces your mutual fund returns. It represents the annual fee for managing the fund, deducted from the fund's total returns. A higher expense ratio results in lower net returns for investors.

Which is better for tax-saving: Mutual funds or ULIPs?
Both mutual funds (through ELSS) and ULIPs offer tax-saving benefits under Section 80C. ELSS offers higher liquidity with a shorter lock-in period of three years, whereas ULIPs combine insurance with investment but have a longer lock-in period of five years.

Do ULIP charges reduce over the policy term?

Yes, ULIP charges like premium allocation and policy administration charges often reduce over time, especially after the initial years. This structure helps increase the fund value as your investment matures.

What are the hidden charges in ULIPs and mutual funds?

ULIPs may have fund management, mortality, policy administration, and switching charges. Mutual funds may include expense ratio, exit load, and transaction charges. These are disclosed in the policy or scheme documents, so not truly “hidden,” but often overlooked.

Are mutual fund charges regulated by SEBI?

Yes, SEBI regulates all mutual fund charges. It sets limits on expense ratios and mandates transparent disclosure of all costs, ensuring investor protection and fair practices across fund houses.

Can I switch funds in a ULIP without charges?

Most ULIPs offer a limited number of free switches between fund options each year. Beyond that limit, nominal charges may apply, depending on the insurer’s policy.

What charges are unique to ULIPs?

ULIPs come with charges not found in mutual funds, such as premium allocation charges, policy administration charges, mortality charges, and fund switching charges. These are deducted from your premium or fund value, making them unique compared to mutual funds, which usually only involve an expense ratio.

Are ULIP charges higher than mutual fund charges?

Yes, ULIPs typically carry higher charges than mutual funds. While mutual funds mainly deduct a single expense ratio, ULIPs include multiple charges like mortality, policy administration, and premium allocation fees. Over time, these can significantly reduce returns, especially in the initial years of investment.

How does the expense ratio affect mutual fund returns?

The expense ratio represents the annual fee charged by a mutual fund to manage investments. A higher expense ratio reduces your overall returns since it is deducted from the fund’s assets. Conversely, a lower ratio allows you to retain more of your earnings, improving long-term compounding.

Can I avoid ULIP allocation charges?

ULIP allocation charges are usually mandatory and deducted upfront from your premium. However, you can minimise their impact by choosing plans with lower charges, comparing insurers before investing, or opting for online ULIPs, which often have reduced allocation and administrative fees compared to traditional plans.

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