Investing in the stock market is a smart way to achieve your financial goals, and both Unit Linked Insurance Plans (ULIPs) and Equity Linked Savings Schemes (ELSS) offer you that chance. However, these two investment options work in very different ways. This article breaks down the ULIP vs. ELSS debate in simple terms so you can understand which one fits your financial goals better. Let’s find the best option for you.
What is ULIP?
A ULIP scheme is an insurance product that also allows you to invest your money in different funds. ULIPs offer life insurance coverage that safeguard your loved ones financially in your absence. Additionally, they have an investment component where you can invest in equity, debt, and hybrid funds based on your risk appetite and future financial goals.
When you pay a premium to the insurance company, a portion of it goes toward providing life insurance coverage, and the rest of the money is invested in funds of your choice.
What is ELSS?
ELSS mutual funds are tax-saving equity funds. They primarily invest in equity and equity-related securities. These funds allow you to invest either through a lump sum or a Systematic Investment Plan (SIP).
Difference between ULIP And ELSS
Here are some differences between ULIPs and ELSS:
- Life cover: ULIPs are insurance products with an investment component. They provide life insurance to ensure financial protection for your family in your absence. This makes ULIPs a dual-purpose product that combines insurance and investment. ELSS, on the other hand, is a pure investment product. It focuses solely on wealth creation and does not offer any life insurance coverage.
- Lock-in period: ULIPs have a lock-in period of five years, during which you cannot withdraw your funds. However, an ELSS mutual fund has a shorter lock-in period of three years, which makes it a more liquid option if you need access to your funds sooner.
- Returns: The returns from ULIPs depend on the performance of the funds chosen, such as equity, debt, or hybrid. While they offer a guaranteed death benefit in the unfortunate event of the policyholder’s demise during the policy term, the maturity benefits vary based on the market’s performance. In contrast, ELSS returns are entirely market-linked and depend on the performance of the fund.
- Tax benefits: Both ULIPs and ELSS qualify for tax benefits under Section 80C of the Income Tax Act, 1961. These investments allow a tax deduction of up to Rs 1.5 lakh annually. Additionally, ULIP death benefits that are given to the nominee are tax-exempt under Section 10(10D).
- Regulatory body: ULIPs are governed by the Insurance Regulatory and Development Authority of India (IRDAI), which is responsible for insurance-related regulations. ELSS is a mutual fund and is governed by the Securities and Exchange Board of India (SEBI).
- Investment choice: ULIPs allow you to choose between equity, debt, and hybrid funds. You can select investments based on market conditions and your financial goals. Additionally, you can switch between funds during the policy term. ELSS investments, however, are exclusively linked to equity. Moreover, they are managed by fund managers that offer professional expertise, and you do not have to select individual investments yourself.
- Risk: The risk in ULIPs depends on the type of funds you select. For example, equity funds carry higher risk, while debt funds are more stable. ELSS, being an equity-focused investment, is inherently risky.
ULIP vs ELSS - Which is better, ULIP or ELSS?
Both ULIPs and ELSS have their advantages and can be used to achieve similar financial goals, but the better choice depends on your needs and priorities. If you are looking for a product that combines life insurance with investment, ULIPs might be the right option. They provide life coverage along with the opportunity to invest in different fund categories such as equity, debt, or hybrid funds. However, ULIPs offer a pre-selection of funds that may limit your choices, as you are restricted to the fund options offered by the insurer.
On the other hand, ELSS are mutual funds that solely invest in equity. They do not offer life insurance, but you can choose your own fund. You can research various ELSS mutual funds and select one that aligns with your investment goals and risk appetite. Moreover, ELSS comes with the advantage of expert professional fund management.
Both products offer tax benefits under Section 80C of the Income Tax Act. However, the choice ultimately comes down to what you value more - the dual benefit of insurance and investment offered by ULIPs or ELSS's focused and professionally managed equity investments.
Conclusion
If you are looking for insurance, you can consider ULIP or other insurance products for that matter. However, if your primary goal is wealth creation through investments, ELSS may align with your needs more. Make sure to evaluate your goals minutely, and you will be able to arrive at a decision.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
