ELSS or ULIP? Which One Should You Choose and Why?

Compare ELSS and ULIPs with factors like taxes, lock-in periods, charges and returns. See which one is a better investment tool for you.

ELSS and ULIPs are two compelling products in the case of long-term investments. ELSS (Equity Linked Savings Scheme) and ULIP (Unit Linked Insurance Plan) are both instruments to help you with tax benefits. Both also serve well for mid-term to long-term time frames.

Basic Differences

 An ELSS invests your money in the purchase of stocks through various diversified funds. They are pure investment tools. You must purchase a separate life insurance.

ULIPs are investment options provided by insurance companies. These provide with life cover as well. They give investors options to buy equity, debt, hybrid or short-term funds. You stand to enjoy from assured, at a minimum of 10 times the premium you pay on a yearly basis. This reduces to 7 times if your entry age is 45 years and above.

Tax Benefits

You can invest up to Rs. 1.5 lakhs if you choose to in either of these funds under Section 80C. Apart from direct tax relief, you also get other forms of tax relaxations. An ELSS has a lock-in period of 3 years. This means any sort of capital gain taxes are not applicable to them. Thus, the invested amount, gains and total maturity amounts are tax-free. This makes them much more lucrative.

Things change a bit with ULIPs. If you choose to surrender the plan within the lock-in period, you are to return any tax claims made. The sum assured is tax-free only if the insured does not make it through the policy tenure. If the policy premiums you pay are more than 10% of the sum assured, you need to pay added taxes as applicable.

Lock-in Period

An ELSS has a minimum lock-in duration of 3 years while a ULIP has a lock-in of 5 years. The former is more liquid, as you can get your money in case of an emergency once you complete 3 years. Though it is not advisable to withdraw either of these plans, as they work best for longer time frames.

Equity schemes serve the best for 7 to 10 years’ bracket. You should hold unit-linked plans for a longer duration of 10 – 15 years.

Charges

ULIPs have much higher charges up front. This is the reason they need a longer time frame for your money to grow. Almost 60% of the money you invest goes into various charges. Fees such as allocation charges, administrative charges, mortality charges and fund management charges get deducted from your premiums. It takes about 3 – 4 years for these to settle down. After that, most of your money gets into investments. To overcome this duration and still get good returns for your investment, you need a time horizon of 10 – 15 years. This can be bit confusing, as you do not get a clear picture of the amount invested.

An ELSS charges fund management fees or expense ratio to their customers. This is a standard fee all mutual funds charge. It is adjusted before the calculation of NAVs (Net Asset Value). Depending on the type of fund you select, the expense ratio is usually up to 3%. Thus, you have better transparency and clarity in case of equity linked schemes.

Switch and Returns

Switching between funds is a unique feature of ULIPs. You can start with higher exposure to equity and reduce the allocation as you age. You cannot do the same with ELSS.

Depending on the type of funds selected, ELSS can give you returns from as low as 8.5% for income funds to a maximum of 18% for Small & Midcap funds. In contrast, ULIPs provide you with 8.5% for income funds and go all the way up to 15% for Small & Midcap funds.

Based on financial goals, you can select either of these instruments. For short- to mid-term goals, ELSS give you superior returns and liquidity. You need to buy a separate life insurance. For events in the future such as children’ education, you can invest in ULIPs. These give you the advantage of in-built life cover.

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