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ELSS mutual funds and ULIPs are quite different from one another, equally lucrative in their purpose. To choose between the two, you must align your financial objective and goals to the schemes and select the one that suits you the best.
Equity-Linked Savings Scheme (ELSS) and Unit-Linked Insurance Plan (ULIP) are two of the most popular investment options covered under the provisions of Section 80C of the Income Tax Act, 1961. The other investment options are Public Provident Fund (PPF), tax-saving fixed deposit, National Pension Scheme (NPS), and so on. These investments offer different return opportunities and risk categorisation, but one common denominator connects them – tax benefit.
ELSS is a diversified, equity mutual fund. The scheme invests in the capital market and selects companies with different market capitalisations. In a financial year, an investor can claim a tax deduction of up to Rs 1,50,000 against investments made in ELSS. These investments have a mandatory lock-in period of three years.
ULIP is an investment plus insurance product where one part of the investment is used for ensuring the investor, while the other part is invested in the products of his/her choice. Investors can choose to invest in equity, debt, hybrid, or money market funds through ULIPs. Of the amount invested in ULIPs, a contribution of up to Rs 150,000 can be claimed as the tax deduction under Section 80C of the Income Tax Act.
These investments have a lock-in of five years. An investor can choose to switch from equity to debt or hybrid as per their investment objective during the lifecycle of the investment.
|Particulars||ULIP (Unit-Linked Insurance Plan)||ELSS (Equity-Linked Savings Scheme)|
|Lock-in period||ULIPs have a mandatory lock-in of 5 years||ELSS has a mandatory lock-in of 3 years|
|Returns||The returns can vary because an investor can choose any combination of equity, debt, hybrid funds in his investment.||Being market-linked, the returns depends on the scheme, but an investor can expect an approximate return of 12%-14%.|
|What are the tax benefits?||The invested amount offers tax deduction under Section 80C, but gains are taxable.||LTCG under ELSS is taxed at 10% over and above Rs 1 lakh|
|What are the charges applicable?||There are complex and multiple charges like policy administration charges, premium allocation charges, mortality charges, etc.||Exit load and fund management charges are specified in the SID clearly and are easy to understand.|
|What about liquidity?||Funds can be available after the lock-in of 5 years subject to further policy conditions.||Funds will be available after the lock-in of 3 years.|
As shown above, ELSS offers a better package if you are investing for tax benefits and are comfortable with the market exposure of your capital. ULIPs, on the other hand, are primarily insurance options but not as efficient as an investment tool. Any investor will do well by keeping these two aspects separate and by picking a plan that aligns with their goals and risk profile.