Two lesser-known financial products that can offer excellent returns are Equity Linked Savings Scheme (ELSS) and Unit Linked Insurance Plans (ULIP). While ELSS is a pure equity mutual fund, ULIP combines insurance and investment, making it a more complex product. In order to understand how these two instruments work and the benefits that they have to offer read on!
What is a Unit Linked Investment Plan?
ULIPs offer the dual benefit of insurance and investment, with the funds pooled in both equity and debt instruments. These investments have a minimum lock in a period of 3 to 5 years and are ideal for generating wealth for short-term goals. But this product comes with a complicated cost structure which makes it difficult for you to understand the working of ULIPs.
What is ELSS?
Equity Linked Savings Scheme are diversified equity funds that offer tax benefits under the Income Tax Act. This avenue has at least 80% of the total assets invested in equity and equity-related instruments for a lock-in period of 3 years.
The power of compounding is what makes these ELSS funds a lucrative option for investors and the high returns helps beat inflation over the long run. However, while compounding can help with wealth generation on paper, the performance of the ELSS is based on the risk exposure to the market.
What are the similarities between ELSS and Unit Linked Plans?
- Both are tax saving instruments.
- They are both exempt under Section 80C of the Income Tax Act.
- The best returns are usually delivered after 7 to 10 years. In case of ULIPs, the period can even be extended to 15 years.
What are the differences between ELSS and Unit Linked Plans?
| Basis | ELSS | ULIP |
| Meaning | ELSS funds are diversified equity funds with a three year lock-in period. | It is a diversified fund with a five year lock in period. |
| Purpose | It is an equity fund to maximise returns. | Mix of life insurance and investment. |
| Equity exposure | The equity exposure can go up to 100%. | One can choose to switch between equity to debt or keep it hybrid. But the number of free switches may be limited. |
| Returns | Being market linked, the returns range between 12 to 14%. | The returns vary as per the type and value of the underlying asset. |
| Charges applied | Exit load and fund management charges are the expenses incurred. | Administration charges, mortality charges, premium allocation charges and fund management charges are the expenses incurred. |
| Lock in period | It is for 3 years. | In theory, they have a 5 year lock-in period, but in practice it is 10 to 15 years. |
| Transparency and liquidity | Greater transparency and liquidity. | Low transparency and liquidity. |
| Switch options | There is no such option available. | One can alter the ratio or type of fund invested in – the investment can either be equity, debt or a hybrid of the two. |
| Tax on maturity amount | There is a tax deduction available under 80C but the gains are taxable under the Act. | The maturity amount is taxable under capital gains tax.The long term capital gains amount to rupees zero up to Rs. 1,00,000.Long Term Capital Gains tax to be taxed at 10% without indexation benefits for amounts exceeding Rs. 1,00,000. |
Which option offers more benefits?
An investor is to choose to invest in either options or both based on his or her financial profile and investment goals. There is no clear-cut answer as to which of the two are better modes of investment. If one wishes to gain greater tax benefits while having a greater market exposure then ELSS is the option that one must go for. ULIPs are more suited as insurance rather than investment tools. Some experts even suggest the investors go in for pure term insurance policies to insure their lives while investing in other market instruments for wealth accumulation and growth capital, ignoring investments in ULIPs altogether.
Frequently Asked Questions
- Are ULIPs and ELSS short term investment schemes?
No, both ULIPs and ELSS are long term financial products with a predetermined lock in period.
- Are ELSS funds high risk investments?
Yes, ELSS investments are high risk as it depends on the market performance of the fund.
- Who are the regulators of ELSS and ULIP?
ELSS funds are regulated by the Securities Exchange Board of India (SEBI) and ULIP plans are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
