ULIP vs ELSS: Due to many options of capital investment, people are confused as to which investment will be better for them. Similarly, investors are confused about which option is better in ELSS or ULIP. Basically both the options are almost the same as the capital under both the options is invested in the stock market and both can claim exemption under section 80C of income tax. In such a situation, the better of both the options can be selected on the basis of the characteristics of both.
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Understand ULIP vs ELSS like this
- ULIP is such an investment option that also offers insurance cover whereas ELSS is a complete investment option. ULIPs have a lock-in period of 5 years while ELSS has a lock-in period of three years.
- Investments made in ULIPs are exempt under section 80C and returns/profits up to a maximum of Rs 5 lakh are also tax free under section 10(10D). On the other hand, as per the tax rules of Long Term Capital Gains (LTCG) on ELSS, investment up to Rs 1 lakh in a year is tax free and investment up to Rs 5 lakh in a financial year is tax free under section 80C.
- Investments in ULIPs can be transferred from one fund to another fund like equity, debt, hybrid, balanced or money market whereas no such facility is available in ELSS but Systematic Transfer Scheme can be started after the lock-in is over .
- There is a lack of transparency in ULIPs as it does not reveal where the money has been invested whereas in ELSS their complete information is available.
- ULIP plans attract a fee of 2.25 per cent for policies of 10 years or more and a maximum of 3 per cent for other tenures, whereas in case of ELSS, the fund management charges can be up to 2 per cent depending on the fund of the plan. Gets adjusted in NAV. Apart from this, less charges are applicable in the direct plans of ELSS.
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it would be better to invest in
- For investors who want better growth in short term investments, ELSS option is better. Apart from this, it is also better for those who are not dependent on investment income for their livelihood, then they can invest for a long time and create a huge fund in the form of profit.
- The biggest feature of ULIPs is that it offers market returns as well as insurance coverage. It is better for those who want insurance cover along with market returns. It can be understood with an example that if a person has paid three annual installments of 50 thousand rupees (ie 1.5 lakh rupees) for the sum insured of 5 lakhs and dies, then the nominee will get 5 lakh rupees. On the other hand, if he has paid 9 premiums (ie Rs 4.5 lakh) and dies, then if the fund value is Rs 5.95 lakh at present, then the nominee will get the sum insured or the fund value whichever is higher i.e. Rs 5.95 lakh.
- Returns get reduced due to fees. In terms of returns, ELSS gives returns of up to 13-17 per cent whereas ULIPs can yield up to 8-10 per cent on a 5-year basis and the lock-in period of ULIPs is also higher than ELSS.
- ELSS is market linked, so it is better for those who can take market risk.