Equity Linked Savings Scheme (ELSS) and Unit Linked Insurance Plan (ULIP) are functionally two different investment vehicles. Which one is better, really depends on your personal investment goal, risk appetite, kind of tax benefits you are looking for and various other factors. Let’s understand the features of ELSS and ULIP to help you arrive at a decision.
ELSS is a diversified equity fund. It is a special class of mutual funds that mostly invest in stocks. It is a savings scheme through which you can invest in the equity market. There is no option to invest in the debt funds. The returns are dependent on the market performance of these equity funds.
ULIP is a combination of a market linked investment and an insurance policy. One part of the premium is invested in the charges towards life cover, while the rest is invested in debt, equity or a mix of debt-equity funds. The returns are dependent on the market performance of an asset class.
ELSS vs ULIP – A Quick Comparision
|Type||Diversified equity fund||A combination of a market linked investment and an insurance policy.|
|Life Cover||No. The investor does not get any death benefit.||Yes. The investor gets the death benefit up to the amount of sum assured.|
|Choice of Investment||Only equity funds||Equity, Debt or Balanced|
|Method of Investment||Two methods: Lumpsum and Systematic Investment Plan (SIP)||Two methods: Lumpsum and Systematic Investment Plan (SIP). An investor can opt for a monthly investment option in ULIP under SIP.|
|Offered By||Mutual fund companies||Insurance companies such as ICICI Prudential|
|Lock-in Period||3 years||5 years|
|Liquidity||An investor cannot withdraw the funds before maturity. A full exit from the investment is the only option.||An investor has an option of partial withdrawals of up to 20% the fund value every year from the 6th year onwards.|
|Charges||The charge can be maximum of flat 2.5% of the total investment.||The charges cannot be more than 3%. In the case of some ULIP plans like ICICI Pru Life Elite Life, the charges can be as low as 1.35%.|
|Returns||Depend on the market performance of equity funds, subject to high volatility. They have given an average of 27.3% returns in last 3 years. (See performance chart below)||Depend on the market performance of the asset class in which the money is invested in – equity, debt or balanced. The returns on ULIPs with an aggressive allocation (50-75% of the portfolio in stocks) have risen 28% in the past year (See performance chart below)|
|Free Look Period||The free look period not available. Investment once made can be withdrawn only after the lock-in period or after paying exit charges.||There is a 15 day free look period. It means that an investor can return his policy within 15 days of purchase if he is not satisfied with it.|
|Fund Switching||There is no fund switch option. An investor has to stay invested till 3 years or move out by paying exit charges.||There is an option to make unlimited fund switches based on market fluctuations or investment goals. The investor has a control over his investments.|
|Loyalty Additions and Wealth Boosters||Not available.||Available only in ULIPs. An investor is rewarded with loyalty additions and wealth boosters on staying invested in a ULIP over the long term. They are given on the fund value, which can be a very large amount. They also help in offsetting the charges of ULIPs.|
|Tax Benefits||Exemption up to Rs 1.5 lakh from total deductible income under Section 80C.||
ELSS vs ULIPs Performance
The Verdict – Which is Better?
Again, it actually depends on what are your investment goals and other factors. In case, you have an investment horizon of 8 – 12 years, ELSS would be a good option. However, if your investment outlook is about 12 – 15 years and you are looking for wealth creation in the long term, ULIP should work in your favour.
ELSS could be a risky proposition since the investment is entirely in equity funds, which are highly vulnerable to market volatility. So, if you are a conservative or a first-time investor, it would be a good idea to secure your funds with ULIP as the risk allocation is better. You can invest in the funds of your choice – equity, debt or an equity – debt mix. In fact, you can switch between these funds as and when you deem necessary and capitalize on the market fluctuations.
It might be also inconvenient to manage savings, wealth and insurance plans separately. ULIPs offer benefits of savings, growth and life protection under one umbrella. For instance, with ULIPs from ICICI Prudential, you can not only flexibility and control of your investment, but also secure your family’s future in case of the unfortunate event of your death.
ULIPs have better tax advantages options as there are tax exemptions on investments, switches and returns. So, if you are a very active investor, you may want to think about investing in ULIPs for this reason too.
ELSS or ULIP – take your decision only after listing your financial goals and what you seek to achieve from them.