ELSS vs ULIPs: Which is better?

Dec 06, 2018 | 2 weeks ago | Read Time: 3 minutes | By iKnowledge Team

Both, equity linked savings schemes and unit linked insurance plans have their merits upon which you must base your investment plan.

ELSS or ULIP? This question has crossed almost every investor’s mind when considering equity investments in their investment plan. With the data available on various financial literary sources, coming up with a solid answer can be a little troublesome. The conflicting answers on these sources have only caused more confusion than provide a solid solution.

Aegon Life tries to solve this dilemma and makes it easy to formulate a decision for your investment plan, by providing insight and information about what ULIP and ELSS are. Approaching agents from either end – mutual fund agents or insurance agents, will only lead to the same conflicting answers and confuse you further. Instead, we aim to guide you on the different merits of both choices and which one suits your financial goals and milestones.

Both ULIPs and ELSS are competing products, designed to give you an option to invest in the equity markets through professional help. The similarities between both end with the fact that these products invest in equity and are designed as tax-saving financial instruments. Their objectives, however, differ based on your requirement and goals. Hence, to sufficiently compare the two, we must first understand exactly what ULIPs and ELSS are, and what they have to offer.

ULIPs

Unit Linked Insurance Plans or ULIPs, are hybrid investment vehicles that are offered by insurance companies only. By hybrid, we mean that the policy offers a dual benefit of being an insurance plan as well as an investment plan. This means that you are purchasing what is potentially a life insurance policy that allows you to invest in equity markets. A portion of the premiums that you pay under this policy is pooled into an equity investment fund. In the event of your demise, while the ULIP policy is in place, your nominee is liable to receive the death benefit as seen with a potential life insurance policy. Your nominee gets the sum assured or the fund value of the invested units, whichever is higher.

The introduction of ULIPs began with an unfortunate misunderstanding that led investors to expect high returns, which wasn’t the case. Ever since, ULIPs have come a long way in terms of policy reforms. Based on the amendment made on the new bill by IRDA in 2010, charges on ULIP investment plans have been capped at a maximum 2.25%. Hence, premium allocation charges along with policy administration charges cannot exceed this capping. Some insurance companies offer the benefit of overlooking the allocation charge altogether, like Aegon Life’s iInvest Insurance Plan. Fund management charge cannot exceed 1.35%, too. These amendments make ULIPs quite beneficial and cost-effective as compared to many mutual funds. Some unique points about ULIPs are:

  • Tax benefits covered under Section 80C and exemptions under Section 10(10D)
  • Ability to switch between Equity, Debt and Balanced Funds
  • 5-year lock-in period

ELSS

Most investors choose the mutual funds route to generate returns from their equity investment plan in capital markets, unless their risk appetite allows them to invest in the stock market directly. Equity Linked Savings Scheme or ELSS is as one would describe a middle ground between direct market investments and mutual funds.

Given that ELSS invests in equity and equity-related products, the potential for returns is high, but being market-linked, the volatility of it makes returns on the capital invested beyond anyone’s guarantee. However, investments in ELSS allow you to opt for SIPs. SIPs help in averaging rupee cost to protect you from the high volatility of capital markets. Market predictions are difficult but navigable through SIPs that make it easier to benefit from both, the ups and downs of the market.

  • Equity and equity-based products only, which means no switching.
  • Investments non-taxable under Section 80C and returns exempted from tax under the Long Term Capital gains tax rule.
  • 3-year lock-in period.

To conclude

ELSS investments are pure equity investments and have the high-risk potential to yield sizeable returns. The preferred means of generating good returns from ELSS is to opt for SIPs and benefit from both, small investment amounts and large payouts. ULIPs on the other hand are meant for long-term personal goals that span across 12-15 years such as child education, marriage, retirement corpus and so on. In such a case, ULIPs have proven to be quite the success in terms of returns. Additionally, you also get the benefit of life insurance coverage to protect your loved ones against financial insecurity in your absence. What you must choose from these options depends entirely on your investment plan.

II/Oct 2018/4535


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