ELSS and ULIP - Detailed Comparison
When it comes to making systematic investment plans, two options often collide head-to-head in earning our approval: Equity Linked Savings Scheme, ELSS, and Unit Linked Insurance Plan, ULIP. While they are both market-linked, they cater to different sets of financial goals, risk appetites, and investment spaces. They are equally instrumental in the process of wealth creation, but in their own ways. Let’s compare the two in detail and learn their pros and cons.
What is ELSS?
ELSS is a mutual fund that involves investing in equities. This attracts tax benefits under Section 80C of the Income Tax Act, 1961. It typically comes with a lock-in period of three years, making it one of the shortest tax-saving instruments available on the market. This plan is ideal for investors seeking to increase their capital by investing in equity markets while also minimising their tax liability.
What is ULIP?
ULIP, on the other hand, is a plan that combines life insurance with investment. This allows policyholders to invest in equity, debt, or hybrid funds while also enjoying life coverage from their policy. Premium payments are split between investment and insurance, and these plans also attract tax benefits under Section 80C. The lock-in period here is five years, which is ideal for those who wish to combine life protection with wealth creation, while also benefiting from tax savings. Insurance providers, such as Jio Insurance Broking, offer competitive packages in this category.
Differences between ELSS and ULIP
ELSS and ULIP have their pros and cons. In some aspects, ELSS proves to be the better option, and in others, ULIP fares better in comparison. Let’s examine their key differences and compare them.
| Type | ELSS | ULIP |
|---|---|---|
| Purpose and Structure | It is an investment vehicle focused on wealth creation through equity investments. | It is a combination of an insurance policy and an investment plan. Premium payments are split between the two categories. |
| Identity | This is purely investment-focused, but also helps reduce tax liabilities. | This is a blend of insurance and investment. |
| Lock-in Period | Three years | Five years |
| Tax Benefits | Investments up to ₹1.5 lakh annually are deductible under Section 80C. Long-term capital gains (LTCG) exceeding ₹1.25 lakh are taxed at a rate of 12.5 %. | Premiums up to ₹1.5 lakh qualify for Section 80C deductions. Maturity proceeds are tax-free under Section 10(10D) if the premium is less than 10 % of the sum assured. |
| Returns | Due to 100% equity exposure, the return potential is higher in comparison. However, the returns are linked to the market and can therefore be volatile. Historically, returns range from 12 to 15 %, although this is not a guaranteed metric. | Returns depend on the funds chosen for the investment. Generally, returns are lower in comparison due to the charges involved. 10 to 12 % returns could be expected in the long term. |
| Risk Profile | High risk due to exposure to the equity market. | Risk level varies based on the choice of funds. Equity funds - high risk, debt funds - low risk, and balanced funds - moderate risk. |
| Cost and Charges | Low-cost investment, as expenses typically amount to 1 or 2%. | The cost is higher here due to several charges, including a premium allocation charge, a mortality charge, a fund management charge, and a surrender charge. |
| Switching Between Funds | An ELSS investment comes with a 3-year lock-in. Thus, you cannot make any switches within that tenure. Any switches can only be done after 3 years, subject to taxes. | In a ULIP, on the other hand, you can switch your entire fund or future premiums tax-free, that too at zero cost. Most insurers allow you a set number of free switches during a policy year. Also, there are no tax implications on fund switches. |
| Flexibility | Since the lock-in period is short, flexibility is limited. Either the lump-sum mode or the Systematic Investment Plan mode has to be chosen. | There is flexibility in terms of switching between funds, making partial withdrawals after the lock-in period, and redirecting premiums. |
| Transparency | Highly Transparent. There is a clear disclosure of portfolio holdings, expense ratios, and Net Asset Value (NAV). | Less Transparent due to the presence of multiple charges and a complex structure. |
| Life Cover | No life insurance component is included due to the plan's general structure. | Life insurance coverage is included, and the coverage amount is typically 10 to 20 times the annual premium. |
| Suitability | Suitable for young investors who are generally more risk-tolerant. Disciplined investors using Systematic Investment Plans (SIPs) can opt for this. | Suitable for those who are looking for long-term investment plans with low - moderate risk, and a life insurance coverage. |
Key Considerations
- Financial Goals: Choose ELSS for pure wealth creation, ULIP for dual benefits of insurance and investment.
- Investment Horizon: ELSS suits 3-5 year goals; ULIPs are better for 10+ years due to charges and lock-in.
- Risk Appetite: High-risk investors may prefer ELSS; those seeking balanced options may opt for ULIPs.
- Budget: ELSS requires lower investment; ULIPs involve higher premiums due to insurance costs.
Conclusion
ELSS and ULIP serve distinct purposes within investment plans. ELSS is ideal for tax savings and high returns with a shorter lock-in, while ULIP plans offer life cover and flexible fund options for long-term goals. Your choice depends on whether you prioritise pure investment (ELSS) or a combination of insurance and wealth creation (ULIP). Jio Insurance Broking can enhance decision-making by providing tailored ULIP solutions and expert advice. Assess your financial objectives, risk tolerance, and investment horizon to select the right option.
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