ULIP vs ELSS: Which one should you choose?

• Follow

Many people want to invest in market-linked instruments. There is a host of options in the market that can confuse one. Each investment option comes with key features. Experts suggest that one must first understand and then compare the various options available before deciding to select one. Equity Linked Saving Scheme (ELSS) and Unit Linked Insurance Plan (ULIP) are some of the most preferred retirement-related investment options. Both promise attractive returns and tax benefits. However, ELSS mutual funds and ULIPs are quite different from one another.

Here is a comparative analysis.

Equity Linked Saving Scheme

ELSS is a diversified equity-oriented mutual fund scheme. It is also popularly known as tax saving mutual fund. Because ELSS offers dual benefits of wealth creation and tax saving. Funds under this scheme primarily invest into the capital market and select companies with different market capitalisations. As a result, the returns earned are linked directly with the market.

Unit Linked Insurance Plan

On the other hand, Unit Linked Insurance Plans (ULIPs) are unique insurance plans that offer life insurance coverage and investments. The objective of an ULIP is to offer the opportunity for wealth growth alongside insurance coverage. The premium paid by the investors has two portions. The first portion goes towards the premium for the insurance coverage, and the rest goes towards investment.

Comparison

i) Investment type

ELSS is purely an investment-based product and regulated by Sebi while ULIP is a combination of investment and life insurance. It is regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

ii) Lock-in period

ELSS comes with a mandatory lock-in period of three years. In case of ULIPs, the lock-in period is five years.

iii) Flexibility

ULIPs offer flexibility to switch between funds. This means you can switch from equity-oriented funds to debt funds and vice versa, depending on your changing choice.

In ELSS, there is no flexibility of switching funds. ELSS funds come under the open-ended equity category.

iv) Charges

According to market experts, fund management charges associated with ELSS are quite high.  ULIPs, on the other hand, come with much lower fund management charges, standing at around 1.35%. However, there are other charges applicable to ULIPs.

v) Tax benefits

You can avail tax deduction up to Rs 1.5 lakh on investments in ELSS every year. But there is no upper limit on the amount you can invest.

On the other hand, you can avail up to Rs 1.5 lakh as a tax deduction on your ULIP premium. Besides, the returns at the time of maturity are exempt from income tax under Section 10(10D) of the Income Tax Act.

vi) Loyalty

You will earn loyalty benefits if you stay invested in ULIPs through the policy term. But there are no loyalty benefits applicable in ELSS.

vii) Risk and returns

ELSS falls in the high-risk category and the returns are dependent on the performance of the market. On the other hand, ULIPs are primarily insurance products. As a result, the fund managers try to avoid high risk strategies.

Expert view

“Both ELSS and ULIP are popular investment avenues in India. There are many similarities between these two. Both have tax benefits. But, I think, in terms of returns, ELSS is preferable to ULIPs. Though both link returns with the market, generally ELSS fund managers promise 12 to 14% annual return for long term investment. On the other hand, returns from ULIPs are more volatile,” said Suman Nandi, a chartered accountant.

Nandi also added that, in terms of liquidly smaller lock-in periods is an attraction for ELSS.