Unit Linked Insurance Plans (ULIP) and Equity Linked Saving Schemes (ELSS) are both tax-saving investment opportunities. But functionally, there is nothing common between them. If you have to choose between the two, you must consider two things – your financial objectives and long-term goals. Once you have a clear picture of both, you should pick the plan that suits you best.
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What is a ULIP?
A ULIP is an investment instrument that also offers life cover. A part of the premium paid for a ULIP will be used to provide life cover to the investor. The rest of the money can be invested in funds of the investor’s choice. The investor can choose to put their money in debt, hybrid, equity or money market funds through ULIPs.
Besides, under Section 80 C of the Income Tax Act, an investor can claim up to Rs. 1,50,000 as tax deductions for investing in a ULIP. However, it’s important to remember that such investment plans generally have a lock-in period of around five years. An investor can choose to shift from a debt fund to an equity or hybrid fund whenever they wish to during the lifecycle of their investment, but withdrawing the money within the first five years could lead to a penalty.
Things to Know About ULIPs
- ULIPs offer the protection of insurance and the power of investment.
- A part of the premium you pay for your ULIP goes towards managing your insurance and policy expenses.
- Once these demands are met, the rest of the amount is divided between buying fund units for investments and providing you with life cover.
- Expenses involved in ULIPs include administration charges, fund management charges, premium allocation charges and mortality charges.
What is ELSS?
An ELSS is as an equity instrument that you can use to grow your investments and funds. However, it does not offer any life cover like a ULIP. During the financial year, an investor can claim a tax deduction of up to Rs. 1,50,000 against investments made in this scheme. Such investments can have a lock-in period of three years.
Things to Know About ELSS
- You have the freedom to invest as much money as you like.
- When compared with ULIPs, ELSS appears to offer higher returns and a shorter lock-in period.
- Under ELSS, you can continue to invest even after the lock-in period is over.
- The risks involved are higher, but returns are also bigger.
As you can see, in this ULIP vs ELSS battle, both plans offer different pros and cons. In order to understand which plan might be better for you, you need to evaluate your financial situation and long- and short-term goals. The plan you ultimately choose will depend largely on these factors and your appetite for risk. Once you know which plan suits your needs best, you can go ahead and start investing for the future.
