Understanding the Key Differences Between ULIP and ELSS Fund

ELSS and ULIPs are two investment products that are often compared, especially during the tax-saving season, as both offer tax benefits under Section 80C of the Income Tax Act of 1961. This comparison frequently sparks debate among investors trying to determine which option is superior. To provide clarity and aid investors in making informed decisions, this article will delve into an in-depth comparison of ULIP and ELSS, highlighting their key differences and helping readers identify which product may better suit their financial objectives.

Understanding ULIPs

Investment plans known as ULIPs combine investing and insurance into a single plan. When one purchases a ULIP, a portion of the premium is used to pay for life insurance, and the remainder is invested in a number of market-linked funds. These funds may favour debt or equity investments, or a combination of the two. With ULIPs, policyholders have the freedom to change funds based on their risk tolerance and market circumstances.

Understanding ELSS

ELSS Funds are a particular class of mutual funds that provide tax advantages under Section 80C of the Income Tax Act. ELSS funds, which invest largely in stocks, are required to have a three-year lock-in period, during which time investors are unable to redeem their units. When compared to other tax-saving investing choices, ELSS funds are renowned for their ability to offer better returns. 

Difference Between ULIP and ELSS

Tax Advantages 

• Investing in ELSSs and ULIPSs, or unit-linked insurance plans, can help investors save on taxes. However, the advantages vary. 
• Investments in ELSS are eligible for tax benefits under Section 80C of the Income Tax Act. 10% tax is applied to LTCG under the ELSS on amounts over ₹1,00,000. However, ELSS investment returns are likewise tax-free.
• In contrast, ULIP is an insurance programme that also provides investing alternatives. Section 80C of the Income Tax Act allows tax deductions for ULIP premium payments up to a maximum of ₹1.5 lakh. The tax treatment of ULIP investment returns is determined by the investor’s income tax bracket.

Charges

• For ELSS, the annual fund management fees average 2.5% of the assets under management (AUM). Fund administration fees, transaction fees, and exit loads are just a few possible extra costs.
• ULIP fees are often greater than ELSS fees. Among the accounts that come with ULIPs are premium allocation costs, fund management fees, mortality fees, and administrative costs. Depending on the particular ULIP plan, these fees can vary, however, they can total up to 20% of the premium in the first year before steadily declining in subsequent years.

Liquidity

• A mutual fund that primarily invests in the equity shares of corporations is called the Liquidity Equity-Linked Savings Scheme. The investor cannot withdraw their investment during the three-year lock-in period for these funds. After the lock-in period, the investor can, however, withdraw the money they deposited or sell the units on the stock market.
• A unit-linked insurance plan combines investing with insurance. Investors have a variety of funds to select from, including balanced, debt, and equity funds. ULIPs typically have a 5-year lock-in term during which the investor cannot withdraw the money they have put. After the lock-in period, the investor can, however, withdraw the money they deposited or cancel the insurance.
• Since ELSS funds have a shorter lock-in period and may be sold on the stock exchange, they provide greater flexibility in terms of liquidity. On the other hand, ULIPs have a longer lock-in period, and the investor must resign from the policy in order to get their money back.

Returns

• A mutual fund that primarily invests in stocks and securities with an equity component is called the Returns Equity-Linked Savings Scheme. The performance of the underlying stock market serves as the basis for the returns produced by ELSS.
• ELSS funds typically produce larger returns when the market is performing well, and lower returns when the market is performing poorly. A life insurance programme that also includes investment opportunities is called a unit-linked insurance plan. The performance of the underlying investment alternatives, which may include stocks, bonds, and other assets, determines the returns provided by ULIPs. Because ULIPs allocate a portion of the investment towards providing life insurance coverage, they often provide lower returns than ELSS funds.
• Returns from ELSS and ULIP depend on market performance. Although ULIP includes investing and insurance, ELSS is a pure investment option that generates greater returns. So, before selecting among these possibilities, it’s crucial to assess one’s investing needs and risk tolerance.

Benefits of ULIPs

• Life Coverage: ULIPs offer life insurance coverage, ensuring one’s family’s financial stability in the event of any unlucky circumstance.
• Wealth Creation: Over the long term, the investing component of ULIPs has the potential to provide significant returns, aiding in the achievement of one’s financial objectives.
• Tax Benefits: Section 10(10D) of ULIPs permits tax-free withdrawals at maturity, while Section 80C allows tax deductions for premium payments.
• Flexibility: ULIPs provide the choice to swap between funds, allowing investors to adapt their investments to shifting market circumstances and risk tolerance.

Benefits of ELSS

• Tax Savings: ELSS funds provide tax deductions under Section 80C of up to ₹1.5 lakh, reducing taxable income.
• Less Time Locked-In: The three-year lock-in period of ELSS funds gives additional liquidity and enables investors to access funds sooner if necessary.

Disadvantages of ULIPs

• Costs: ULIPs may incur various costs, which can reduce the investment’s total profits.
• Long Lock-in Duration: The five-year lock-in period of ULIPs may not be suitable for investors seeking more liquidity.

Disadvantages of ELSS

• Market Risk: ELSS funds are subject to market swings as they invest in stocks, which may result in losses during unfavourable periods.
• Lack of Life Insurance: Unlike ULIPs, ELSS funds do not offer any form of life insurance coverage.

ULIP Vs ELSS: A Comparative Analysis

Particulars	ELSS	ULIP
Objective	Professionally managed ELSS offers diversified equity investments alongside professional management.	Provides life insurance along with investment returns and tax benefits.
Returns	Market-linked, typically yielding returns around 12–14%.	Returns vary based on the combination of equity, debt, and hybrid funds.
Lock-in Period	Mandatory 3-year lock-in period.	Mandatory 5-year lock-in period.
Application Fees	Fund management fees and exit loads may apply.	Fees for premium allocation, policy administration, mortality, etc.
Regulator	Regulated by SEBI.	Regulated by IRDA.
Transparency	Investors can easily monitor performance for full transparency.	Fund managers oversee operations.
Risk	High risk due to market dependency for returns.	High risk due to market performance, but includes assured life insurance.
Loyalty Enhancements	Not applicable.	Loyalty additions provided for continuing policy investment as per terms and conditions.

Conclusion

Both ULIPs and ELSS funds have certain advantages and characteristics of their own. ULIPs provide the benefit of insurance protection coupled with the ability to build wealth, whereas ELSS funds only concentrate on equity investments and tax benefits. One’s risk tolerance, investment horizon, and financial objectives must all be taken into account while deciding between the two options. To make a sound decision, it is also essential to consult with an expert, and learn more about investment with Share India.

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