New Delhi, Sept. 17 -- A unit linked insurance plan takes each premium, deducts a portion towards life cover and applicable charges, and invests the balance in market-linked funds that the policyholder selects. It carries a five-year lock-in, and life cover runs through the policy term. A mutual fund does one thing, investing, with liquidity and a wide universe of schemes to choose from, and no insurance component. Neither description is a criticism. They are different tools built for different jobs, and many households hold both.

Liquidity is the practical dividing line. Anyone who may need their money within five years should not place it in a ULIP, and no responsible advisor would suggest otherwise. That is what liquid funds, deposits...