Understanding the Key Differences Between ULIP & ELSS Fund

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ELSS and ULIPs are two such products that are frequently contrasted, and the argument comes up again and again throughout tax-saving season. Both goods fall under the category of investment items and offer tax advantages under Section 80C of the Income Tax Act of 1961. As a result, it is only reasonable for investors to be uncertain about which is superior and to compare the two. To help readers decide which product will work best for them, we will compare and contrast ULIP vs ELSS in-depth in this article.

What are ULIPs?

Investment plans known as ULIPs combine investing and insurance into a single plan. When you purchase a ULIP, a portion of your premium is used to pay for life insurance, and the remainder is invested in a number of market-linked funds. These funds may favor debt or equity investments, or a combination of the two. With ULIPs, policyholders have the freedom to change funds based on their risk tolerance and market circumstances.

What are ELSS?

On the other hand, ELSS Funds are a particular class of mutual funds that provide tax advantages under Section 80C of the Income Tax Act. ELSS funds, which invest largely in stocks, are required to have a three-year lock-in period, during which time investors are unable to redeem their units. When compared to other tax-saving investing choices, ELSS funds are renowned for their ability to offer better returns. Now let’s understand about ULIP and ELSS difference.

Difference Between ULIP vs ELSS

Here, let’s go through the specific ULIP and ELSS difference:

Tax Advantages 

Investing in ELSSs and ULIPSs, or unit-linked insurance plans, can help investors save on taxes. However, the advantages vary. 

Investments in ELSS are eligible for tax benefits under Section 80C of the Income Tax Act. 10% tax is applied to LTCG under the ELSS on amounts over Rs 1 lakh. However, ELSS investment returns are likewise tax-free.

In contrast, ULIP is an insurance programme that also provides investing alternatives. Section 80C of the Income Tax Act allows tax deductions for ULIP premium payments up to a maximum of Rs. 1.5 lakh. The tax treatment of ULIP investment returns is determined by the investor’s income tax bracket.

Charges

For ELSS, the annual fund management fees average 2.5% of the assets under management (AUM). Fund administration fees, transaction fees, and exit loads are just a few possible extra costs.

ULIP fees are often greater than ELSS fees. Among the accounts that come with ULIPs are premium allocation costs, fund management fees, mortality fees, and administrative costs. Depending on the particular ULIP plan, these fees can vary, however they can total up to 20% of the premium in the first year before steadily declining in subsequent years.

Liquidity

A mutual fund that primarily invests in the equity shares of corporations is called Liquidity Equity-Linked Savings Scheme. The investor cannot withdraw their investment during the three-year lock-in period for these funds. After the lock-in period, the investor can, however, withdraw the money they deposited or sell the units on the stock market.

A unit-linked insurance plan combines investing with insurance. Investors have a variety of funds to select from, including balanced, debt, and equity funds. ULIPs typically have a 5-year lock-in term during which the investor cannot withdraw the money they have put. After the lock-in period, the investor can, however, withdraw the money they deposited or cancel the insurance.

Since ELSS funds have a shorter lock-in period and may be sold on the stock exchange, they provide greater flexibility in terms of liquidity. On the other hand, ULIPs have a longer lock-in period, and the investor must resign the policy in order to get their money back.

Returns

A mutual fund that primarily invests in stocks and securities with an equity component is called Returns Equity-Linked Savings Scheme. The performance of the underlying stock market serves as the basis for the returns produced by ELSS.

ELSS funds typically produce larger returns when the market is performing well, and lower returns when the market is performing poorly.

A life insurance programme that also includes investment opportunities is called a unit-linked insurance plan. The performance of the underlying investment alternatives, which may include stocks, bonds, and other assets, determines the returns provided by ULIPs. Because ULIPs allocate a portion of the investment towards providing life insurance coverage, they often provide lower returns than ELSS funds.

Returns from ELSS and ULIP are depending on market performance. Although ULIP includes investing and insurance, ELSS is a pure investment option that generates greater returns. So, before selecting amongst these possibilities, it’s crucial to assess your investing needs and risk tolerance.

Benefits of ULIPs 

  • Life Coverage: ULIPs offer life insurance coverage, assuring your family’s financial stability in the event of any unlucky circumstance.
  • Wealth Creation: Over the long term, the investing component of ULIPs has the potential to provide large returns, assisting you in reaching your financial objectives.
  • Tax Benefits: Section 10(10D) of ULIPs permits tax-free withdrawals at maturity, while Section 80C permits tax deductions for premium payments.
  • Flexibility: Since ULIPs provide you the choice to swap between funds, you may adapt your investments to shifting market circumstances and risk tolerance.

Benefits of ELSS

  • Tax Savings: ELSS funds provide tax deductions under Section 80C of up to Rs. 1.5 lakh, lowering your taxable income.
  • Less Time Locked In: The ELSS funds’ three-year lock-in term gives you additional liquidity and enables you to access your money sooner if necessary.

Disadvantages of ULIPs

  • Costs: There are a number of costs associated with ULIPs, which may reduce your investment’s total profits.
  • Long Lock-in duration: Investors wishing for more liquidity may not be comfortable with the five-year ULIP lock-in duration.

Disadvantages of ELSS 

  • Market Risk: ELSS funds invest in stocks, which are prone to market swings and may incur losses during bad periods.
  • Lack of life insurance: Unlike ULIPs, ELSS funds do not offer any kind of life insurance.

ULIP vs. ELSS: Comparative Analysis

ParticularsELSSULIP
ObjectiveProfessionally managed ELSS offers the benefit of diversified equity investments in addition to being professionally managed.Provides life insurance and the advantages of investment return and tax reduction.
ReturnsSince they are market-linked, returns vary depending on the plan, but an investor may generally anticipate a return of 12–14%.Due to the fact that an investor can mix and match equity, debt, and hybrid funds in his investment, the returns may vary.
Lock in period3 years of required confinementMandatory 5-year lock-in
Application FeesFees for fund management and exit loadsCosts associated with the allocation of premiums, policy administration, mortality, etc.
RegulatorSEBI is the ELSS funds’ regulatory body.IRDA regulates ULIP plans.
TransparencySince investors may routinely check the performance, ELSS funds provide complete transparency.The managers of the funds are in charge of the funds.
RiskELSS funds are high risk investments because the fund’s performance on the market determines all of the investment returns.ULIP plans are high risk investment alternatives since the fund’s performance in the market determines how much money is returned. The plan does, however, also provide assured life insurance. 
Loyalty EnhancementsSuch loyalty enhancements are not relevant.For continuing to invest during the course of the policy, loyalty addition is provided.  According to the terms and conditions of the policy, loyalty added bonuses are awarded.

Conclusion

Both ULIPs and ELSS funds have certain advantages and characteristics of their own. ULIPs provide the benefit of insurance protection coupled with the ability to build wealth, whereas ELSS funds only concentrate on equity investments and tax benefits. Your risk tolerance, investment horizon, and financial objectives must all be taken into account while deciding between the two options. To make a sound decision, it is also essential to consult with an expert, learn more about investment with Share India.

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