ELSS vs ULIP

ELSS vs ULIP 

The primary difference between ULIP and ELSS is that ULIP investments work as an insurance plan and simultaneously provide the policyholder with investment benefits, whereas ELSS is a pure investment scheme that mainly attracts investors because of its tax benefits. 

This article covers: 

What is ULIP?

Unit Linked Insurance Plans, also known as ULIPs, are a class of financial products that combine investment and insurance coverage for their clients or investors. In this type of investment plan, a specific part of the funds are used for insurance purposes and the rest is used in investing in a particular product (based on the investor’s choice). 

ULIP has the ability to provide a sense of security to investors because of its fundamental features of being utilized as an investment as well as an insurance policy. Furthermore, as an investor, you can freely select from different assets, such as equity, money market instruments, debt, etc., to invest in. 

Another exclusive advantage of investing in ULIP is that investors can apply for a tax deduction of up to Rs. 1.5 lakh as per Section 80C of the income tax act. The money you are going to invest in ULIP is going to be locked for at least five years, meaning you won’t be able to withdraw the money during this tenure. However, you can switch between different assets (for instance switching from equity to hybrid) during this lock-in period to fulfill your financial goals. 

What Is ELSS Mutual Fund?

ELSS, or Equity Linked Savings Scheme, is a mutual fund program that focuses on investing money in market-available equity-related securities. ELSS has become an extremely popular mutual fund scheme because it offers tax exemptions that are not available in any other type of mutual fund investment scheme in the market. Investors can claim up to Rs. 1.5 lakh of tax exemption by investing in this type of mutual fund scheme.

The returns on ELSS tend to be high in comparison to fixed deposits and other fixed-income streams of similar nature because it is directly connected to the stock market. However, you also need to note that there is a minimum lock-in period involved in ELSS, which is only three years. 

Due to market fluctuations, it is a slightly risky investment option, and you will only be able to withdraw money after your funds have matured. Whatever returns you receive from the ELSS will be regarded as LTCG or Long Term Capital Gain, and you will be obliged to pay a tax of 10% on the same amount. 

Difference Between ELSS and ULIP

The primary difference between ULIP and ELSS is that ULIP investments work as an insurance plan and simultaneously provide the policyholder with investment benefits, whereas ELSS is a pure investment scheme that mainly attracts investors because of its tax benefits.

FactorsELSSULIP
Nature of investment Pure financial investment toolActs as both an insurance and investment tool
Lock-in periodA minimum of 3 yearsA minimum of 5 years
Switching allowed during the lock-in periodIn ELSS, you cannot switch from one scheme to another because the money is invested into equities and equity-related instrumentsYou can switch between different assets such as money market instruments, debts, balance, equity, hybrid, etc., but the total number of switches and switching charges will depend on the company itself
ObjectiveTo provide significant returns to the investors through equity-related investments & tax benefits up to 1.5 lakhs A triple benefit product designed to offer life coverage, tax benefit, and return on investment
RegulatorSecurities and Exchange Board of India (Also known as SEBI)Insurance Regulatory and Development Authority of India (Also known as IRDAI)
Liquidity levelHighLow
Level of risk involvedHighly risky, but the returns on investment will depend on the current market condition as well as the fund manager’s expertiseHighly risky. Your life coverage is guaranteed by the company, but the capital and return on investment are not guaranteed
Tax benefitsTax deductions of up to Rs. 1.5 lakhs available under Section 80C of the IT Act. If your LTCG is less than Rs. 1 lakh, then you won’t have to pay any taxes on the sameTax deductions of up to Rs. 1.5 lakhs available under Section 80C of the IT Act. Your return on investment can also be exempted, given that your life courage is 10 times the size of your yearly premium
TransparencyAll the details related to the funds and equities are available with minute detailsDoes not possess much transparency on where funds are being invested
Charges involvedIn ELSS, the investor will need to pay fund management charges in the form of an expense ratio which is up to 2% (maximum). This amount gets adjusted through the NAV of the scheme. If you have opted for direct plans, then the charges can be lowerFor ULIPs over 10 or more years, the charges are 2.25%, whereas for other plans you will need to pay 3% (maximum)
Loyalty bonusNo loyalty bonus is available Investors can be eligible for a loyalty bonus if they remain invested for the entire policy tenure and according to the terms and conditions of the scheme

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ELSS vs ULIP- Quick Summary

  • ELSS vs ULIP – ELSS is a type of mutual fund that offers tax benefits to its investors, whereas ULIPs act as insurance coverage, tax saving instrument, and investment option.
  • ULIP is a triple-benefit financial instrument.
  • As a mutual fund, ELSS mainly focuses on utilizing its funds to invest in equities and gain returns from the same.
  • Both ELSS and ULIP are excellent tax-saving instruments that can offer inflation-beating returns and are better than fixed deposits or any other fixed-income instrument.
  • There is no asset-switching option available for ELSS, but you can freely change your asset class if you have selected a ULIP scheme.
  • Both financial instruments can offer investors up to Rs. 1.5 lakh tax deduction as per Section 80C of the Income Tax Act, 1961.

ELSS vs ULIP- Frequently Asked Questions

1. Which is the better option for an investor: ELSS vs ULIP?

If you are willing to take advantage of tax benefits, then investing in ELSS is the best option because it will enable you to take advantage of the tax-saving scheme offered by Section 80C of the Indian income tax act. On the other hand, if you are looking for an insurance plan that can simultaneously offer you investment benefits, then ULIP would be the most suitable option for you. 

2. ELSS vs ULIP vs Mutual Fund: which one should you choose?

Mutual funds are beneficial for long-term investors, whereas ULIP offers insurance benefits in addition to investment benefits. Equity Linked Saving Scheme is the only type of mutual fund investment scheme where you can take advantage of tax deductions according to Section 80C of the Indian income tax act, 1961. 

ULIP is a triple-benefit financial instrument where you can receive tax deductions and investment returns apart from receiving an insurance benefit. However, the investment returns of ULIP are not significant in comparison to ELSS and other types of mutual fund investment schemes.

3. Are ULIPs better than mutual funds? 

By subscribing to a ULIP scheme, you will be receiving an insurance policy, tax deduction benefit, and, lastly return on investment when the lock-in period is over. On the other hand, mutual fund schemes can only offer long-term returns on your investment (except for ELSS mutual fund schemes that provide additional tax deduction benefits to the investor).

4. What is the difference between ULIP, ELSS, and SIP?

SIP or Systematic Investment Plan is a method through which retail investors can participate in multiple financial instruments and slowly build their wealth. ELSS is a type of mutual fund scheme that supports the SIP method of investment.  ULIPs are a class of financial products that combine investment and insurance coverage for their clients or investors.

5. Why is ELSS high-risk?

The main reason behind the high-risk status of ELSS is that it is an equity-based mutual fund scheme, and it has already been established in the stock market that any equity-based scheme is of high risk (in general terms).

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