ELSS vs ULIP – Comparative Analysis

When choosing the right investment plan for yourself, the parameters it is mainly judged on is the returns it generates and the benefits offered over time. Each investment instrument available in the market comes with key features that must be compared before deciding to opt for one.

However, a common debate that arises when looking for market-linked investment options is whether to opt for ELSS or ULIP plans. While both promise attractive market returns, it becomes challenging to decide which investment option will suit a person’s long-term financial goal. Before you choose between the two investment vehicles, first align your financial goals to the respective schemes and then choose a plan that best suits your financial needs.

To help make your decision simpler, this article gives a comparative analysis between the two investment tools.

ULIP or ELSS?

The following table will give you an overview of ULIP and ELSS based on different parameters.

 

Unit Linked Insurance Plans (ULIPs)

Equity Linked Saving Scheme (ELSS)

Investment Type

A combination of investment and insurance.

Purely an investment based product.

Investment Objective

With ULIPs, not only you enjoy the benefits of investments but also tax relief and life insurance coverage.

ELSS are professionally managed funds that allow you to benefit from diversified equity investments.

Regulatory Body

Insurance Regulatory and Development Authority of India (IRDAI)

Security and Exchange Board of India (SEBI)

Lock-In Period

Comes with a lock-in period of five years

Comes with a lock-in period of three years

Tax Benefits

Premiums paid are exempted from tax under Section 80C of the Income Tax Act, 1961.

Also, maturity benefits are tax-free under Section 10(10D) of the Income Tax Act.

Money invested in ELSS is taxable under Section 80C.

Also, the returns of up to INR 1 lakh every year are exempted from tax under Long Term Capital Gains (LTCG) tax rule.

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 the market performance.

In ELSS, there is no flexibility of switching funds. The entire amount is invested in equity funds.

Applicable Charges

Charges like policy administration charges, premium allocation charges, mortality charges, etc. are applicable.

Here, the exit load and fund management charges are specified in the SID and are quite easy to understand.

Loyalty Additions

You will earn loyalty benefits if you stay invested in ULIPs through the policy term. Read the ULIP terms and conditions carefully beforehand for the same.

There are no loyalty benefits applicable in ELSS.

Transparency

ULIPs tend to lack transparency. This is because it is difficult to determine where your money is invested.

ELSS offers complete transparency. You have comprehensive insights on where your money is invested.

Liquidity

The money invested is accessible after the five-year lock-in period is over.

The funds are available after the three-year lock-in period is completed.

Risk and Returns

ULIP investments are risky and do not guarantee high returns. This is because the returns are mainly dependent on market performance.

ELSS involves high risk, and the returns are dependent on the performance of the market and fund manager.

What Is ULIP?

Unit Linked Insurance Plans (ULIPs) are unique insurance plans that offer not only life insurance coverage but also provide an opportunity to make market investments. This is achieved by investing a part of the insurance premium into market funds (debt, equity or balanced funds), while the remaining part gets invested in your life insurance.

To understand ULIPs better, consider the following example -

Mr Amit bought ULIP for 10 years and is paying annual premiums of INR 50,000. The insurance coverage offered is ten times than the annual premiums, which means the sum assured is INR 5 lakh.

  • Let us assume that Mr Amit meets with an accident after paying nine premiums. Now, even though the amount paid as premiums adds up to INR 4.5 lakh and the fund value at the time of claim is INR 5.95 lakh, the nominee will receive INR 5.95 lakh in case of Mr Amit’s unfortunate dismissal. This is despite the fact that the sum assured is INR 5 lakh. Here, a high sum assured or fund value is paid in case of policyholder’s sudden dismissal.

  • Let us assume that Mr Amit decides to surrender the policy or withdraw on maturity. In this case, the fund value is paid as per its current market value. Since ULIP returns are dependent on the market performance, the returns are not guaranteed.

Benefits of ULIPs

  • ULIPs offer tax benefits on the premiums paid under Section 80C of the Income Tax Act, 1961. The maximum tax-deductible amount is up to INR 1.5 lakh. Moreover, the maturity amount is tax-free as well under Section 10(10D).
    However, to avail the ULIP tax benefits, the coverage should be at least ten times the annual premiums paid. Otherwise, the tax benefits will only be 10% of the sum assured amount under Section 80C, and the benefits under Section 10(10D) are not applicable.

  • You can switch your investments from equity-oriented funds to debt funds and vice versa. So, in case your investment portfolio is not performing well, you can make the necessary changes. However, make sure whether your insurer charges for the switches or not.

  • ULIP has a lock-in period of five years. This means you cannot surrender the policy during that period. Even if you stop paying the premiums and surrender the policy, the payout will be received after the five-year completion.
    Also, it is wise to invest in long-term ULIPs as it tends to yield relatively high returns when invested in the long run.

Drawbacks of ULIPs

Traditional ULIPs came with multiple charges such as policy allocation charges, policy admin charges, switching charges, redemption charges, fund management charges, mortality charges, and more.

After IRDA took over in 2010, these charges were capped at a maximum of 2.25%. Policy administration and allocation charges cannot exceed this percentage. Also, fund management charges cannot exceed 1.35%.

Despite capping the ULIP charges, quite a portion of the returns is consumed by them. Moreover, since ULIP provides the benefits of insurance and investment, it prevents you from executing a cost-benefit analysis of either of the instruments.

What Is ELSS?

An Equity Linked Saving Scheme (ELSS) is a type of equity mutual fund, where a major portion of your mutual fund investment gets directed towards equity-related securities. As is the norm for all mutual fund investments, the ELSS equity funds are managed by professional fund managers.

Benefits of ELSS

  • ELSS will earn you high returns as the entire amount paid as premium is invested in equity-oriented funds. Traditionally, ELSS made returns between 12-15% annually on average. This investment instrument was one of the highest tax savings products available in the market.

  • ELSS investments can begin through Systematic Investment Plan (SIP) at as low as INR 500 monthly. Also, with SIPs, you can conduct rupee cost averaging, which further protect you against market volatility risk.

  • ELSS has a lock-in period of three years. This means each unit comes with a lock-in period of three years. So, if you take the SIP route, then all the periodic investments are locked for three years. Redemption of the units can be done after completing the lock-in period.

  • Money invested in ELSS is exempted from tax under Section 80C. A maximum amount of up to INR 1.5 lakh every year is tax exempted. Also, returns in the form of Long-Term Capital Gain (LTCG) for up to INR 1 lakh are exempted from tax. Any capital gains exceeding the said limit are taxable at 10%.

Drawbacks of ELSS

  • Even though ELSS yields high potential, the high returns are not guaranteed. This is because the fund value is based on market performance. Hence, investors with a moderate to high-risk appetite should consider investing in an ELSS scheme.

ULIP vs ELSS - A Comparative Analysis

For those looking for a short-term investment plan with quick returns should consider investing in ELSS. Equity market returns are relatively higher than other investment instruments. But you need to be invested in them for a long time to reap the maximum benefits.

So, with the SIP route under ELSS, you can invest small amounts for a shorter time at low volatility risk, and large returns. Also, ELSS provides maximum transparency as it allows you to check the real-time fund performance. This type of investment is ideal for young investors whose livelihood does not depend on the investment income.

ULIPs, on the other hand, offer dual benefits of insurance as well as investment. No other investment instrument offers life insurance coverage benefits while also focusing on wealth creation through market returns.

However, the return potential of ULIP is quite limited because of multiple charges and high commissions of fund managers. The ULIP returns over the completion of the five-year lock-in period is 8-10%.

Compared to ELSS, ULIPs tend to impose low to moderate risk and are quite an ideal investment instrument for all age groups. It is highly recommended to invest in long-term ULIPs as the main purpose of this investment vehicle is to build your wealth over time and enable you to accomplish your financial goals.

Depending on your long-term financial needs, you can choose from a variety of customized ULIP plans.

For instance, the Bajaj ULIP plans available on Finserv MARKETS are tailor-made to secure your child’s future; offer you financial support during your retirement, or solely widen your investment horizon over the next few years. To choose from the top-rated funds across industries for your ULIP investment, visit Finserv MARKETS now!

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