Both ELSS and ULIP provide you tax benefits under section 80C of the Income Tax Act. But both these investment avenues serve different purposes.
ELSS invest in equity shares of companies, which makes it more risky. Because the returns of these mutual funds are market-linked, and there is a risk of losing money. In addition, this mutual fund comes with a lock-in period of 3 years, so you cannot withdraw the amount before the completion of three years.
Whereas ULIP is an insurance plan with an investment component. The premium you pay for a ULIP policy gets invested in equity, debt, or a mix of both.
The difference in ULP and ELSS is that ULP provide life insurance cover. So in case of a mishap, a death benefit or the fund value will be paid to the nominee. Plus, ULIP also has a lock-in period and it is of 5 years.
Let's compare ELSS and ULIP to determine the best investment option based on your goals.
Difference Between ULIP and ELSS
Nature of Investment
Looking for a tax-saving investment, invest in ELSS (Equity Linked Savings Scheme). This is a pure investment product that focuses on equity markets. But there are also plans like ULIP (Unit Linked Insurance Plan) that combine both insurance and investment.
Lock-in Period
ELSS comes with a 3-year lock-in period, allowing investors quicker access to their funds. In contrast, ULIPs have a longer lock-in period of 5 years.
Returns
ELSS funds, being equity-based, often offer higher returns compared to ULIPs. However, ULIPs may provide lower returns as a portion of the premium covers insurance charges.
Tax Benefits
Both ELSS and ULIPs offer tax benefits under Section 80C of the Income Tax Act. ELSS investments have LTCG (Long-Term Capital Gains) taxed at 10% above Rs 1 lakh. ULIPs offer tax deductions up to Rs 1.5 lakh, with returns taxed according to the investor's income tax slab.
Charges
ELSS funds typically have fund management charges around 2.5% of AUM per year, with potential additional charges. ULIPs tend to have higher charges, including premium allocation, fund management, mortality, and administrative charges, which can be as high as 20% of the premium in the first year.
Liquidity
ELSS funds are more liquid due to their shorter 3-year lock-in period and can be sold on the stock exchange after this period. ULIPs have a 5-year lock-in, and to access funds, the policy must be surrendered, impacting liquidity.
Investment Tracking
ELSS requires active monitoring and research due to market volatility. ULIPs, while involving some level of monitoring, also have a portion of the investment allocated to insurance, which may not keep pace with inflation.
Suitability
ELSS is suitable for investors with a high-risk tolerance and a long-term investment horizon, while ULIPs are better for risk-averse investors seeking a combination of insurance and investment.
Comparative Analysis: ULIP vs ELSS
| Factors | ULIP (Unit Linked Insurance Plan) | ELSS (Equity Linked Savings Scheme) |
| Tax Benefits | Tax deduction under Section 80C. Gains taxable. | LTCG taxed at 10% on and above Rs 1 lakh |
| Charges | Policy administration, premium allocation, mortality, etc. | Exit load and fund management charges |
| Liquidity | Funds available after 5 years, subject to conditions | Funds available after 3 years |
| Returns | Vary based on market performance and insurance costs | Depend on the scheme (approx. 12%-14%) |
| Lock-in Period | 5 years | 3 years |
Conclusion
Both ELSS and ULIP have their advantages and drawbacks. ELSS tends to offer higher returns and better liquidity due to its shorter lock-in period but requires a higher risk tolerance. ULIPs provide the dual benefit of insurance and investment but come with higher charges and a longer lock-in period.
The choice between the two depends on your investment goals, risk appetite, and financial needs. Consulting with a financial advisor can help you make an informed decision tailored to your specific circumstances.
FAQs
Which ELSS Fund you should invest in?
This depends on your risk tolerance, investment goals, and investment horizon. It's best to do your research, compare different ELSS funds based on their performance, expense ratio, and investment style. Consider consulting a financial advisor for personalized recommendations.
How to compare ULIP plans?
Look at factors like premium amount, fund allocation options, charges (allocation charges, premium allocation charges, policy administration charges, etc.), maturity benefits, death benefit payout, and lock-in period. You can use online comparison tools or consult an insurance advisor.
What is last 10 year return of ULIP?
There's no single answer as ULIP returns depend on the specific plan and its underlying investments. You can find past performance data on the insurance company's website or brochures, but past performance is not a guarantee of future results.
Can I get redemption before 3 years in ELSS?
No, ELSS has a mandatory lock-in period of 3 years from the date of investment. You can only withdraw after 3 years with some exceptions (medical emergencies, child's higher education) and may incur penalty charges.