Financial products that offer two benefits in one are a boon for any investor. For the average investor, sometimes, good returns are not enough. They also look for the tax-saving aspect of the product, the risks it brings along, the lock-in period, and so on. Only after these aspects are in alignment with an investor’s financial goals do they go with the product. Out of the many such products, two that have gained immense popularity for their varied features are ELSS and ULIPs. A ULIP plan offers an insurance + investment approach, while ELSS is perfect for mutual fund investors looking for high tax-saving plans. Which one would be more suitable for you? A look at the features of both will be of help.
Working of ELSS vs ULIPs
An ELSS or Equity-linked Savings Scheme is a pure investment product. It is a mutual fund product wherein the money that you invest is pooled by the company with the money from other investors. The investment is carried out in the equities market. Hence, the returns depend completely on market performance. The returns on the pooled investment are distributed to the investors as per their share in the invested amount.
The premium of a ULIP plan is used for investment in a similar manner as stated above as well as to build your life coverage. So, along with wealth creation, you are also securing the future of your loved ones in case anything unfortunate happens to you.
ELSS are popularly known as tax-saving mutual funds because they offer the most tax savings within the mutual funds category. An ELSS investor can claim up to Rs 1.5 lakhs as per Section 80C of the Income Tax Act.
ULIP benefits are numerous when it comes to tax-saving. Section 80C also allows for tax deductions of up to Rs 1.5 lakhs against the premiums of ULIPs. Along with that, the pay-outs of your ULIP policy are tax-exempted and so are the partial withdrawals that you can make once the lock-in period is over as per Section 10 (10D).
Note that the tax benefits change as per amendments in tax laws and are subject to various terms and limitations.
Accessibility of returns
One can access their returns from their ELSS investment after the scheme has completed the lock-in period, which is 3 years. The investor may have to pay an exit load charge depending on when and how much they are withdrawing.
A ULIP has a lock-in period of five years. The policyholder can access their returns only after the end of this period. Even if they surrender their policy during the lock-in period, the returns will be made available only after the end of five years. One can make multiple partial withdrawals from their ULIP plan after five years. Some insurers may levy a small charge if the number and extent of withdrawals cross a particular limit.
Since ELSS investments are completely based on equities and depend on market performance, they carry a higher amount of risk.
ULIPs offer three options for investors with varying risk-taking capacities. For the risk-averse investor, there are debt funds. Those with a high risk- appetite can opt for equity funds. A combination of both is also available for those with moderate risk-taking capacity. You can get an understanding of how each type of fund affects your returns with the help of a ULIP plan calculator.
ELSS is solely an investment product. The investment firm is not concerned with providing any other benefits or services to you.
On the other hand, a ULIP offers the opportunity to not only invest in the market and gain returns but also get life coverage. Besides the life cover, you can also opt for riders to increase the level of financial protection in your life. For instance, you can opt for the critical illness insurance rider. If you are diagnosed with a critical illness, this rider helps relieve the financial worries of such a situation by providing a hefty lump sum amount to the policyholder. A ULIP plan calculator can be used to understand the hike in the premium due to the addition of these riders.
ELSS and ULIPs are two unique products. However, if you are looking for protection beyond investment, then ULIPs are the ideal option due to the various ULIP benefits they offer. It is also advisable to consult a financial expert and get their opinion on the same.