ULIP vs ELSS

In the world of financial planning, investment options play a vital role in helping individuals achieve their long-term goals. Among the various investment avenues available, Unit Linked Insurance Plans (ULIPs) and Equity Linked Savings Schemes (ELSS) are two popular choices. Both ULIPs and ELSS offer the potential for wealth creation and tax benefits, but they differ in various aspects.

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Top ULIP Funds
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AUM
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AUM
Returns (in %)
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11,380 Cr
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24.25%
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23.2%
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AUM
Returns (in %)
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241 Cr
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13.58%
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14.47%
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12.81%
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13.28%
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523 Cr
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10.86%
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11.04%
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13.3%
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11.91%
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11.02%
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21 Cr
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13.59%
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11.77%
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Fund Name
AUM
Returns (in %)
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5 Year
10 Year
487 Cr
Returns
19.06%
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16.57%
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16.12%
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243 Cr
Returns
7.25%
Returns
8.16%
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9.18%
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777 Cr
Returns
5.17%
Returns
7.26%
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8.29%
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305 Cr
Returns
5.9%
Returns
7.06%
Returns
8.07%
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466 Cr
Returns
4.96%
Returns
7.46%
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8.05%
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What are ULIPs?

ULIPs are investment plans that combine investment and insurance into a single plan. When you invest in a ULIP, a part of your premium goes towards providing life insurance coverage, while the remaining amount is invested in a variety of market-linked funds. These funds can be equity-oriented, debt-oriented, or a mix of both. ULIPs offer policyholders the flexibility to switch between funds based on their risk appetite and market conditions.

What are ELSS Funds?

ELSS Funds, on the other hand, are a specific category of mutual funds that offer tax benefits under Section 80C of the Income Tax Act. ELSS funds primarily invest in equities, and they come with a mandatory lock-in period of three years, which means investors cannot redeem their units before the completion of this period. ELSS funds are known for their potential to deliver higher returns compared to other tax-saving investment options.

Key Differences between ULIPs and ELSS

  1. Nature of Investment

    ULIPs are a combination of insurance and investment, providing a life cover along with the opportunity to grow your money in the market. ELSS funds, on the other hand, are purely investment-oriented and do not provide any life insurance coverage.

  2. Tax Benefits

    Both ULIPs and ELSS offer tax benefits, but they operate differently. ULIPs provide tax exemption on the maturity amount under Section 10(10D) of the Income Tax Act. On the other hand, ELSS funds offer tax deductions up to Rs. 1.5 lakhs on the invested amount under Section 80C.

  3. Lock-in Period

    ULIPs have a lock-in period of 5 years, which means you cannot withdraw your investment before completing five years. ELSS funds have a shorter lock-in period of 3 years, making them more liquid compared to ULIPs.

  4. Flexibility

    ULIPs offer the flexibility to switch between funds based on market performance and the policyholder's changing financial goals. ELSS funds do not provide this switching option, and investors have to stay invested for the entire lock-in period.

  5. Charges

    ULIPs come with various charges, such as premium allocation charges, policy administration charges, fund management charges, and mortality charges. In contrast, ELSS funds have comparatively lower expense ratios, making them more cost-effective.

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Advantages of ULIPs

  • Life Coverage: ULIPs provide life insurance coverage, ensuring financial security for your family in case of any unfortunate event.

  • Wealth Creation: The investment component of ULIPs has the potential to generate significant returns over the long term, helping you achieve your financial goals.

  • Tax Benefits: ULIPs offer tax-free withdrawals on maturity under Section 10(10D) and tax deductions on premium payments under Section 80C.

  • Flexibility: With the option to switch between funds, ULIPs enable you to align your investments with changing market conditions and risk appetite.

  • Loyalty Benefits: ULIPs offer loyalty addition as a reward for staying invested throughout the policy tenure. This bonus is granted based on the policy's terms and conditions, providing an additional benefit to loyal policyholders.

Advantages of ELSS Funds

  • Tax Savings: ELSS funds offer tax deductions up to Rs. 1.5 lakhs under Section 80C, reducing your taxable income.

  • Shorter Lock-in Period: The three-year lock-in period for ELSS funds provides more liquidity and allows you to access your funds sooner if needed.

Disadvantages of ULIPs

  • Charges: ULIPs come with various charges, which can affect the overall returns on your investment.

  • Long Lock-in Period: The five-year ULIP lock-in period may not suit investors looking for more liquidity.

Disadvantages of ELSS Funds

  • Market Risk: ELSS funds invest in equities, which are subject to market fluctuations and can result in losses during bearish phases.

  • No Life Coverage: Unlike ULIPs, ELSS funds do not provide any life insurance coverage.

ULIP vs ELSS: Comparative Analysis

Particulars Equity Linked Savings Scheme (ELSS) Unit Linked Insurance Plans (ULIP)
Objective ELSS is a professionally managed fund that also provides the advantage of diversified equity investments. Offers the benefit of investment return along with tax relief with life coverage
Returns  Being market-linked, the returns depend on the scheme, but an investor can expect an approximate return of 12-14%. The returns can vary because an investor can choose any combination of equity, debt, hybrid funds in his investment.
Lock-in period 3-years mandatory lock-in 5-years mandatory lock-in
Liquidity High Low
Applicable Charges Fund management charges  and exit load charges Premium allocation charges, Policy administration charges, mortality charges, etc.
Regulator ELSS funds are regulated by SEBI ULIP plans are regulated by IRDA
Loyalty Additions No such loyalty additions are applicable Loyalty addition is offered under the policy for staying invested throughout the policy tenure. Loyalty addition bonus is given as per the terms and conditions of the policy.
Transparency ELSS funds offer full transparency as the investors can track the fun regularly. The funds are managed by the fund managers.
Risk ELSS funds are high risk investments as the investment returns entirely depends on the market performance of the fund. ULIP plans are high risk investment options as the returns entirely depend on the market performance of the fund. However, the plan offers also guaranteed life cover. 

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Conclusion

Both ULIPs and ELSS funds have their unique features and benefits. ULIPs offer the advantage of insurance coverage along with the potential for wealth creation, while ELSS funds focus solely on equity investments and tax savings. When choosing between the two, it's essential to consider your risk tolerance, investment horizon, and financial goals.

Remember to consult with a financial advisor l before making any investment decisions. 

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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