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Equity-Linked Savings Scheme (ELSS) or Unit-Linked Insurance Plan (ULIP): Which One Is Better For You?

ICICI Securities 08 Apr 2022
  • Both ELSS schemes and Ulips are market-linked tax-saving options
  • Both offer a deduction of up to Rs 1. 5 lakh under Section 80C of the Income-tax Act
  • However, ELSS schemes score on liquidity as it has a three-year lock-in period versus the five-year lock-in of Ulips
  • Plus, Ulips charge for the insurance component, which is not the case with ELSS schemes
  • Ulips allow you to switch between different asset classes 5-7 times in a year
  • ELSS is a pure equity product and its returns are in sync with the market’s

There is always a big dilemma in front of investors while choosing between equity-linked savings schemes (ELSS) and unit-linked insurance plans (Ulips) during the tax-saving season as both offer tax benefits.

Let’s explore the suitability of both these products to different investors.

They Are Close Cousins

ELSS and Ulips are close cousins because both of these instruments are among the most popular investment options covered under the provisions of Section 80C of the Income-tax Act, 1961. Investment made in these two instruments allows you tax deduction up to Rs 1.5 lakh in the year of investment.Moreover, both are among the few market-linked tax-saving instruments. While ELSS if offered by mutual funds, Ulips are a part of the product suite that insurance companies have.

What Differentiates Them?

The feature that differentiates these two products is the insurance cover. Ulips provide you insurance coverage along with investment, while ELSS offers you only investment. Another thing that differentiates the two is the lock-in period. Ulips have a mandatory lock-in period of five years, while ELSS comes with a lock-in period of three years. This means ELSS scores better in terms of liquidity of fund because of a shorter lock-in period.In case of Ulips, you can utilise the fund subject to policy terms and condition. No such terms  and conditions are applicable in ELSS and you can use funds freely after the lock-in period. 

Do They Offer The Same Returns?

This is one major question that always lingers in the minds of investors while deciding between these two products. The answer is no.This is because Ulips come in different variants. ULIPs allow you to choose between a combination of debt and equity allocation according to your risk appetite. It also allows you the switch option using which you can alter the allocation towards either of the asset classes, according to the market conditions and your need. As you know, debt inherently offers more safety than equity but at the same time offers lower returns than equity. So, if you choose to remain invested in a debt-oriented Ulip, it will offer lower returns when markets are bullish. However, in a volatile or bearish market condition, this option will offer you more safety and maybe better returns. Typically, Ulips provides five to seven free switches between funds in a year which you can use for your advantage.

ELSS does not offer any such option. All ELSS are equity-linked products so they give market-linked returns, which can vary as per the market conditions.Moreover, mortality charges payable in Ulips dents the returns. There is no such charge in ELSS, where the fund will only charge you an expense ratio. The fact that Ulips bundle an insurance cover along with the investment has a charge attached, which is called the mortality charge. When you invest in Ulips, one part of the premium goes for your insurance coverage. This means there is lesser amount left for the investment. The insurance cost attached to Ulips drags down the return.

The Big Question: Which One To Choose?

The answer to this question is not simple and that is why it can’t be same for all individuals. ELSS offers a better investment option if you are investing for tax savings and are comfortable with market volatility. Ulips, on the other hand, are primarily insurance options but not as efficient as pure investment products. Before, deciding on these two products you need to keep in mind whether you want a pure investment product or an insurance-cum-investment product. You should pick a product that aligns with your financial goals and risk appetite.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.Please note that Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. I-Sec does not assure that the fund's objective will be achieved. Please note. NAV of the schemes may go up or down depending upon the factors and forces affecting the securities markets. Information mentioned herein is not necessarily indicative of future results and may not necessarily provide a basis for comparison with other investments. Investors should consult their financial advisers if in doubt about whether the product is suitable for them.The non-broking products / services like Mutual Funds etc. would not have access to Exchange investor redressal or Arbitration mechanism.

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