Thursday, September 27, 2018

An Investor’s Guide to ULIPs and ELSS

Choosing between Unit Linked Insurance Plan (ULIPs) and Equity Linked Savings Scheme (ELSS) through SIP can seem confusing, as both are investment options that offer the benefit of tax deduction under Section 80C of the Income Tax Act. 

It is essential to know the difference between SIP and ULIP since you can opt to invest in an ELSS scheme through a Systematic Investment Plan (SIP) route. 

The choice between the two should be based on your individual financial goals, risk appetite and investment horizon. Before making a decision, let us delve deeper and decode these two products.

What is ELSS?

Equity Linked Diversified Schemes or ELSS is primarily an equity diversified mutual fund scheme that invests in stocks from various sectors and of different market capitalisations. 

You need to lock in your investments for three years in an ELSS. You can claim up to Rs. 1.5 lakhs as a tax deduction against your investment in an ELSS.

What is a ULIP?

A ULIP is an insurance cum investment product, where one part of your investment is directed to give you a sum assured, upon maturity while the remaining is invested in securities such as equity, debt, money market depending upon your preference. 

You need to lock in your investment in a ULIP for five years. Here’s the guide how to choose ulip plan that you can follow to know more things before invest. 

During this timeframe, however, you can choose to switch from equity to debt or hybrid, in case there is a change in your investment objective. You can also claim a deduction of up to Rs. 1.5 lakhs on your investment in a ULIP.

What you should know before investing in ULIPs vs ELSS

Specific factors that make ULIPs a unique investment product are as follows: ULIPs offer you the power of insurance or a security cover along with investment benefits.

Initially, the premium you pay for a ULIP is used for various charges towards life insurance such as mortality charges, fees towards fund management and administration expenses.

Post deductions the remaining premium is divided between providing you a life cover and buying fund units for investment. 

What you should know before investing in ELSS vs ULIP. Certain factors that differentiate ELSS from other investment products are as follows:

ELSS is the only mutual fund product that offers tax benefits under Section 80C of the Income Tax Act.

It has the shortest lock-in period of three years as compared to other tax savings products that come with a lock-in of five years and more.

You can invest in ELSS through a SIP throughout the year, to avoid last-minute tax planning woes.

Since it is an equity-diversified scheme, you can continue to invest in it post the lock-in of three years.

ELSS schemes invest in equities. Thus, the risk involved in ELSS investment is higher as compared to other tax savings instruments, but the returns are potentially higher as well.

Differences between ULIPs and ELSS:

1- Essential feature:

ULIP: Insurance cum investment product that can help you in long-term wealth creation

ELSS: Pure investment product that aids in long-term wealth creation

2- Tax benefits:

ULIP - Annual premium amount is eligible for Tax deduction under Section 80C. Policy pay-outs (death benefits) are exempted under Section 10 D of the Income Tax Act.

ELSS - The amount invested annually in ELSS is eligible for tax deduction under section 80C of the Income Tax Act.

The invested amount in ELSS falls under EEE category. This means it is exempt from taxes at the time of investment, taxes at the time of investment, accumulation and withdrawal

3- Applicable charges:

ULIP - Multiple charges are applicable on ELSS. These include mortality charges, premium allocation charges and administration charges. However, it is not very easy to access information about the premium breakup.

ELSS - Fund management charges and exit load (if you redeem your units before maturity), are explicitly specified in the scheme information document, before investing.

4- Liquidity:

ULIP - ULIPs have a lock-in of 5 years.

ELSS - ELSS has a lock-in of three years.

To read the difference between ULIPs and SIPs, click here.

Which one should you choose?

Both investment products have unique features and are long-term in nature; hence, choose your option purely on your investment objective. However, along these two schemes you have one more choice to invest, i.e: sip. 

You may follow this guide to know more about how to invest in sip. For instance, if your aim is to invest in a single product that takes care of your insurance and investment needs, then ULIPs can be the ideal choice. 

On the other hand, if you wish to compartmentalise insurance and investments and are looking merely for a tax savings product, an ELSS fits the bill.

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