ULIP VS ELSS : Which Investment can give you highest Returns?

Nearly every individual who is looking for an investment in market-linked instruments must have thought about ELSS vs ULIP at least once. And to search for the answer they might have to go through tones of content available on financial websites, which tend to confuse people with their different views. Functionally, there is nothing common between Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs). It is a basic rule to not associate insurance and investments. ULIP vs ELSS is two different products that follow different purposes. While a ULIP is a mix of life insurance and investment offered by life insurance companies, ELSS is an equity fund. Both are tax-saving investments, but the similarity between the two ends there.

The article aims to help investors make an easy decision by bringing them honest insight and information about ULIP vs ELSS a type of mutual fund is and how one should decide to go for such investments.

What are ULIPs? 

Unit Linked Insurance Plans provided by various insurance companies are insurance-cum-investment products. The premium paid by the customer is used in the market and to cover his life. Usually, they offer a minimum sum assured equal to 10 times the annual premium. They are tax-saving tools and enjoy tax benefits as per section 80C. ULIPs have a lock-in period of five years, which means an investor cannot withdraw money before five years of maturity. Even if the premiums are stopped or the investor decides to surrender the policy, the payout is released only after the lock-in tenure is completed.

ULIP offer death benefit to the investor. Hence, in the case of untimely death, the sum assured or the fund value is passed on to the nominee. The amount, whichever is higher, goes to the nominee irrespective of the number of premiums paid. For example, if three premiums are paid, each Rs.50000/-, and the market value at the time of death is Rs.170000/- the nominee gets Rs.500000/- (10 times the annual premium). If the market value is higher, the same is passed to the nominee.

ULIPs do not guarantee returns as they are market-linked products that are invested inequities. Charges which are incurred in the first year include:

• Premium allocation charges           Maximum capping of 2.25%
• Policy Administration Charges
• Fund Management Fees Maximum 1.35%
• Mortality Charges Reduces year on year
• Fund Switching Charges Depends on the individual policy
• Service tax deduction As per Government Rules

The investor can enjoy the benefit of switching funds and thus, he/she gets rewarded as a result of market churning. The profits are exempted from tax. But switching is chargeable.

Points of consideration in ULIP

• ULIPs offer both protection of insurance and the power of an investment. This sets ULIPs apart from other traditional investment policies.
• In the starting years, the premium of the ULIP payment goes towards meeting one’s insurance needs and policy expenses.
• After these deductions, the premium is divided between providing you a life cover and buying fund units for investment.
• The expenses associated with ULIP investment include premium allocation charges, administration charges, mortality charges, and fund management charges.

What is ELSS?

Equity Linked Saving Schemes are real investment instruments that help investors in equity markets. It is a mutual fund scheme that saves taxes as the investment is exempted under section 80C.

The whole funds are invested in equities or equity-related products and hence, the returns are highly unstable. They are therefore recommended to high-risk tolerant investors. To decrease the risk, an investor can choose the option of SIP (Systematic Investment Plan).

In SIP, the investor regularly invests a fixed amount in equity mutual fund schemes and puts an end to unpleasant market situations. In addition, you get more units when the market is low and fewer units when the market is high. Consequently, the purchase cost is averaged and returns are maximized.

SIP is an investment tool where money starts compounding when the investment is done for long periods. Resultantly, you get great returns on regular small investments. At times investors also prefer a ULIP Vs ELSS comparison.

Unlike ULIP, ELSS has a smaller lock-in period of three years. Switching is not allowed in ELSS and the mutual funds can be withdrawn only after a period of three years. 

Points of consideration in ELSS

• Investors are free to invest any amount they like in an Equity Linked Savings Scheme. For deductions in tax, contributions of only up to INR 1,50,000 will be considered under the Income Tax Act, Section 80C.
• ELSS is one of the best investment options for investors which offers tax benefits with potentially higher returns and short lock-in periods.
• The returns on Equity Linked Savings Schemes are not tax-exempt post the changes detailed in the recent Budget.
• You can proceed to invest in this scheme even after the fulfillment of the lock-in period of 3 years.
• The risk involved with ELSS is higher when compared to a Fixed Deposit or a PPF but the returns are potentially higher as well.

Tabular Representation of the differences in ULIPs vs ELSS

When the question is an investment and long-term financial returns, not insurance, you must choose wisely. Thorough detailing of ULIP Vs ELSS must be done before finalizing. The following differentiation will help you decide.

ELSS vs ULIP: A Comparative Analysis

ELSS is good for investors looking for a relatively short term investment with high growth potential. As returns expected from equity markets are comparatively higher than that of other investment classes. But one should remember that a long term investor can only obtain the maximum benefit of wealth creation through equity investments. You can take the SIP route and ride the market wave in order to get the best of both worlds – small investment amounts, lower volatility risk, and large payouts.

ELSS investors have easy access to funds and also can check the fund performance on a real-time basis. It is best suited for young individuals who are not dependent on investment income for livelihood. This way the investor can keep funds invested for a longer period of time which would eventually help in wealth creation in the long term.

On the other hand, the only ULIP advantage is the dual benefit of insurance coverage and market returns. You get a unique product that protects your plan in case of the policy holder’s unfortunate demise along with the wealth creation opportunity through market returns.

However, the return potential of ULIP as a product category is very limited due to the presence of numerous charges and high commissions of agents. While the 5-year returns of best ELSS funds have varied between 13-17%, ULIP could only provide 8-10% returns on a 5-year basis. Further, the lock-in period of ULIPs is much higher than the ELSS.

Also Read: ULIP vs Mutual Fund

Point of Differentiation ULIP vs ELSS

• DIFFERENTIATION ON THE BASIS OF INVESTMENT BENEFITS
• DIFFERENTIATION ON THE BASIS OF DRAWBACKS

On the basis of Investment benefits

ULIP

• In a ULIP product, an individual enjoys tax benefit at the time of investments U/S 80C to the extent of the maximum tax-deductible value of Rs. 1.5 lakh; the returns are totally exempted from tax U/S 10(10D).

However, in order to get complete tax exemption the mandatory life coverage should be a minimum of 10 times the annual premium, or else the tax benefit stands at just 10% of sum assured u/s 80C and Section 10(10D) benefit is not applicable.

• A ULIP investor can switch between funds such as Equity Fund, Debt Fund, Hybrid fund or Money market fund, etc. This gives an individual the liberty to switch funds and time the markets in order to get rewarded as a result of market churning. Switching may come for a charge and the number of times you are allowed to switch is also dependant on individual policies.
• ULIPs come with a lock-in period of 5 years; hence no surrender is permitted during this tenure. Even if someone stops the premium payment or tries to surrender the policy, the payout is made only after completion of 5 years. Further, since the early termination of the policy adversely affects the returns, it is generally a 10-15 year-long commitment.
• The direct ULIPs offered online are great options for investors in terms of convenience. And as far as the mortality charge is concerned it starts diminishing year on year premium payment, as the risk of the Insurance company starts decreasing with premium inflow.

ELSS

• ELSS has great yield potential as the entire collection is invested in equities or equity-related products. Historically, an ELSS scheme has delivered anything between 12-15% per annum returns on an average which is one of the highest in the category of tax-saving investment products.
• You can start investing in ELSS through Systematic Investment Plan (SIPs) with as low as Rs. 500 per month. Further, SIPs help in rupee cost averaging and hence protect an investor from the market lightness risk.
• ELSS comes with a lock-in period of three years, which is the shortest span for any tax-saving investment u/s 80C. Here it implies that each unit has a lock-in period of three years. If you go through the SIP route, then all periodic investments get locked in for 3 years from the date of investment. Each unit can be redeemed only at the completion of three years.
• Any investment in an ELSS fund is tax-free under section 80C maximum up to Rs.1.5 lakh in one year. In addition, returns in form of long-term capital gains up to Rs. 1 lakh are also exempted from tax. However, capital gains exceeding Rs. 1 lakh are taxable at 10%.

On the basis of Drawbacks

ULIP

• When ULIPs were first introduced in 1971, investors expected it to deliver high returns but that did not come to fulfillment due to numerous hidden charges involved. The problem of ULIP is various kinds of expenses charged which include policy allocation charges, policy admin charges, switching charges, redemption charges, fund management charges, mortality charges, etc.
• Though with the entrance of a new bill and a resulting amendment made by the Insurance Regulatory, and Development Authority (IRDA) in 2010, these charges have been capped at a maximum of 2.25%. Charges of allocation along with policy administration charge cannot exceed this capping. And the fund management charge cannot exceed 1.35%.
• However, despite capping the upper limit, a good part of ULIP returns get consumed by these charges. Further, the investment-insurance mix strategy that ULIPs provide prevents the investor from doing a cost-benefit analysis either of the two components of the product.

ELSS

Despite high return potential, being a market-linked product, the returns and capital investments are not guaranteed. Since the returns of market-linked products can be unpredictable, ELSS is best suited for investors having moderate to high-risk desire.

CONCLUSION