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ULIP vs ELSS: Which Plan Offers Maximum Gains?

Sep 16, 2019 | 5 months ago | Read Time: 3 minutes | By iKnowledge Team

When creating an investment portfolio, individuals explore several investment options including ULIPs and ELSS. Both ULIPs and ELSS involve investing in equities and include tax saving features as a part of their plan. In this discussion, we list out the benefits of ULIPs vs ELSS.

What is a Unit Linked Investment Plan?

Unit Linked Insurance Plans offer policyholders the dual benefit of investment and life insurance. In ULIPs, a part of your premium is allocated for investments in equity funds or debt funds, and the other part is reserved for life cover.

Investors also get life insurance benefit when they opt for a ULIP. Upon the death of the investor, the nominee gets the pre-decided sum assured or the full fund value, whichever sum is higher at the time of payout.

For example, Mr. Naidu has bought a ULIP for 10 years for which he pays an annual premium of INR 50,000. The insurance company has offered a sum assured of INR 500,000 which is 10 times the annual premium.

Mr. Naidu’s premiums are allocated for investments in market equities and life cover. If Mr. Naidu suffers an accident or dies after paying 4 premiums, the nominee will get the entire sum assured, i.e. INR 500,000, since the returns on equity investment at this stage is lower than the sum assured.

In another circumstance, Mr. Naidu dies after paying 9 premiums whose total worth is INR 450,000. The nominee receives a payout of a sum equal to the fund value since the amount is higher than the sum assured at this point.

One must realize that returns on equity investment depend on market volatility. Therefore, ULIPs don’t always guarantee profitable returns upon investment.

To counter market volatility, you can choose options such as Equity Fund, Debt Fund, Hybrid Fund. This helps you to adjust your investment strategy according to the shifting landscape of the market.

With ULIPs, your investments up to INR 150,000, as well as returns are exempted from taxation under section 80C and 10 (10D) respectively.

Since ULIPs come with a minimum lock-in period of 5 years, it is ideal for investors who want returns in the long run, say 10-15 years. Therefore, ULIPs are one of the best long-term investment instruments.

What is an Equity Linked Saving Scheme?

Equity Linked Saving Scheme or ELSS is a type of investment strategy where your entire corpus is invested in equity markets. Since equities and equity-related products are affected by market fluctuations, the returns on capital investment cannot be guaranteed. This makes investing in ELSS suitable for investors who are more tolerant of market risks.

However, through ELSS Systematic Investment Plan (SIP), you can counter the effects of market fluctuations. With ELSS SIP, you can invest in market equities at regular time intervals. This negates the risk of investing a lump sum amount and incurring potential losses upon changes in the market situation. ELSS SIP dilutes your risk by giving you a diverse investment option.

Like ULIPs, ELSS investments are exempted from taxation up to a maximum of INR 150,000 under section 80 C of the Indian Tax Act. Moreover, the returns on investment are also tax-free.

ELSS offer two options for investment:

1.    Growth Option: The returns, profits and bonuses obtained from investments are re-invested for future gains. Investors receive returns only after the completion of lock-in period of 3 years.

2.    Dividend Option: Investors receive interim payments of returns in the form of dividends under this option. They can either opt for a regular cash payout or continue buying equities with the dividends.

In summary, ELSS is ideal for investors looking for short-term gains. You should remember that although ELSS may potentially reward you with higher returns, the risks are also greater. You can always opt for ELSS SIP to create a diverse investment portfolio and minimize risk.

ULIPs are great investment instruments if you want maximum returns over a longer tenure. ULIPs are beneficial in securing your future and provides financial support for your child’s education, marriage and other important life stages. Also, you have the added advantage of a life cover. 

Find out more about ULIPs and Aegon Life’s products like term insurance and other products, visit our home page.


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