Hello Readers!
How are you all?
Well, till now we are all aware of the fact that ELSS (Equity Linked Saving Scheme), is a kind of mutual fund that offers tax benefits, on the investment returns. Through one of our previous blogs also, we discussed the facts and details related to ELSS funds.
There are many investors, who often confuse between the two terms, ELSS (Equity Linked Saving Scheme) and ULIP (Unit Linked Insurance plans), as both of these offer tax benefits, as per Section 80C of Income Tax Act 1961, but these two are quite different from each other.
ELSS and ULIP, both of the funds have different objectives and strategies of investments, choosing between the two for an investor, completely depends on the investor's financial objective and goals.
Through this blog, we are going to discuss, what is ELSS (Equity Linked Saving Scheme), what is ULIP (Unit Linked Insurance Plans), and the major differences between the two. Read our blog to know the differences between ELSS and ULIP.
WHAT IS ELSS (EQUITY LINKED SAVING SCHEME)?
ELSS is a kind of close-ended, equity mutual fund scheme, that offers tax-saving features, as per the Section 80C of Income Tax Act 1961, on the returns earned by the investors, investing in ELSS funds. These fund schemes focus its investments in the capital market and select companies with different market capitalizations.
WHAT IS ULIP (UNIT LINKED INSURANCE PLANS)?
ULIP or Unit Linked Insurance Plan is a combination of an investment product and an insurance plan. Yes, ULIP is an investment plus insurance product, where one part of it is invested in the funds as per the investor's choice, whereas the other part is used for ensuring the investor. In ULIP, investors are allowed to choose the funds for their investment like equity, debt, hybrid, or money market funds, also investors are allowed to switch from equity to debt or hybrid as per their investment objective during the life cycle of their investment.
In ULIP, in the initial years, the premium deposited by the investor goes towards meeting one’s insurance needs and policy expenses, whereas, after these deductions, the premium is divided between providing the investor, a life cover and buying fund units for their investment.
DIFFERENCES: ELSS vs ULIP
Returns
- ULIP: In ULIP, the returns may vary as, an investor is independent to choose their combination of funds to invest, like equity, debt or hybrid funds in their investment.
- ELSS: It is an equity-linked scheme, and its investment returns depend on the scheme performance. Generally, Equity funds give returns based on a rate of return up to 10-12%. However, the returns are partly affected by market fluctuations.
Lock-in Period
- ULIP: These funds have a mandatory lock-in period of 5 years, that is investors cannot redeem their fund before 5 years.
- ELSS: These funds have a mandatory lock-in period of three years and investors cannot redeem their funds before a period of five years.
Charges Applicable
- ULIP: In ULIP, the charges levied, are a bit complex, and investors need to understand them properly. There are multiple charges applied in ULIP, like policy administration charges, premium allocation charges, mortality charges, etc.
- ELSS: As per SEBI (Security Exchange Board of India), a kind of managing and operating charge, known as expense ratio, is charged in ELSS funds. These charges are clear and easy to understand.
Liquidity
- ULIP: As fund comprises of a lock-in period of 5 years, they can be redeemed only after a period of five years, redemption before this may not give its investors the calculated results.
- ELSS: As ELSS comprises of a lock-in period of 3 years, they can be redeemed only after a period of three years, redemption before this may charge you a kind of exit load, and also the return generated would be different from calculated results.
Tax Benefits
- ULIP: The returns on investments, offer tax benefits, as per Section 80C, but do remember gains or returns earned are taxable.
- ELSS: As per SEBI (Security Exchange Board of India) and Section 80C of Income Tax Act 1961, investments of only up to Rs 1.5 lakh, in ELSS, are tax-exempt, if any investor exceeds this limit, they won’t be qualified to avail the tax benefits under Section 80C and the Long-Term Capital Gains on ELSS, up to Rs 1 lakh per annum, is exempted from tax, also, the dividend received is tax-free in the hands of investors.
WHICH IS BETTER: ELSS or ULIP?
Choosing one between two options that work completely on different aspects, is a bit difficult. Here also, the ULIP and the ELSS are different from each other and work on different strategies. ULIP offers both protection of insurance and the power of investment, whereas, on the other hand, ELSS is considered, one of the best investment options for investors who are looking for tax benefits with potentially higher returns and short lock-in periods.
If you read the above differentiating points, between ELSS and ULIP, you can conclude, that ELSS offers a better package if you are investing for tax benefits and are comfortable with the market exposure of your capital, whereas if you are looking for insurance cover plans, then ULIP’s can be considered a good investment tool for them.
As of now, you are aware of the concepts of both ELSS and ULIP, and their offerings, so before choosing between the two, analyze your aspects, requirements, and goals, then pick a plan that aligns with your goals and risk profile.
Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.
You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).