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ELSS vs ULIP – Analysing the Best Scheme for Tax Savings

Investment often comes with the responsibility of minimising the tax. A major part of that responsibility is navigating the landscape of tax-saving investment options. ELSS (Equity Linked Savings Schemes) and ULIP (Unit Linked Insurance Plans) have emerged as prominent tax-saving schemes in the fiscal market.
 

With the potential to grow wealth and tax benefits, the Association Of Mutual Funds In India (AMFI) reported an average annual return of 12%. Simultaneously, a significant revolution in fund allocation at lower charges has been seen in the ULIP schemes.
 

When everyone aims to achieve financial security, such lucrative performance metrics of both tax-saving schemes could confuse you. Let us look at this analysis of ELSS vs. ULIP to help you with the same.


A Brief Overview Of ELSS And ULIP
 

ELSS and ULIP are two of the most dynamic investment instruments with a policy of consistently providing higher returns than other traditional tax-saving schemes.
 

Both schemes are eligible under the Section 80C Act of tax-saving investment. However, there are individual goals that distinguish ELSS and ULIP funds. Be it the structure, feature, or advantages offered to investor preferences.
 

On a primary basis, the ELSS mutual fund invests in equity-related securities in a lock-in period. On the other hand, ULIP is a hybrid financial plan combined with insurance and investment components.
 

How ULIP works is that a part of your ULIP premium is provided towards coverage for life insurance, and the remaining amount is invested in a range of funds. These funds are based on an individual’s financial goals.
 

ELSS funds aim at long-term wealth generation through a mandatory lock-in period of three years, and by harnessing the potential in the equity market, ULIP fund’s prominent feature is that investors could switch to different mutual funds. This is of great help in case of risky market conditions.
 

However, these mutual fund schemes qualify for tax deductions up to a maximum of ₹ 1.5 lacs under the Income Tax Act of Section 10(10D) and Section 80C.
 

Importance Of Tax-Saving Investment
 

Undoubtedly, every individual’s financial planning includes a role in tax-saving investments. But why is so much emphasis,  implied on tax-saving investments?
 

These are among the best ways to reduce the tax burden in this economically struggling world. Tax-saving investments such as ELSS and ULIP funds also play a prominent role in accumulating wealth through their compounded annual growth capital appreciation.
 

Moreover, the tax-saving investment allows investors to diversify their risk across different forms, such as mutual funds, fixed deposits, National Pension Systems (NPS), and Public Provident Funds ( PPF).
 

Lastly, tax-saving investment’s major importance is achieving a long-term vision beyond immediate financial needs.
 


Risk and Returns: ELSS vs ULIP
 

Before diving into the comparative analysis of these two crucial tax-saving investment schemes, it is essential to analyze the risk and returns. Both of these investments have their unique elements of risk tolerance.
 

In terms of ELSS funds, where the investment is done in equities, it is evident that they experience certain fluctuations over the period that can negatively impact the fund’s performance. However, for ULIP, the risk element is quite low for investors since you can switch the schemes if you sense any risk profiles.
 

While talking about the potential returns, the ELSS funds are famous for their substantial returns over the long term. It is evident that assets always outperform other wealth creations and come with higher trade-off volatility.
 

On a comparative analysis, ELSS funds offer more returns due to the inquiry assets, whereas ULIP plans have a balance of returns where you can manage the market returns.

 

Comparative Analysis: ELSS vs ULIP
 

  • Investment Flexibility

    Investment flexibility means the level of freedom an investor has to make changes and adjustments to their investment. The equity investment of ELSS funds makes them less flexible. Hence, in the case of ELSS funds, an investor has to trust their manager’s experience.

    However, ULIPs have more flexibility to offer compared to an ELSS. Here, investors can choose from the various fund options after evaluating the risk, equity, or debts. A major flexible aspect of ULIPs is that the investors can switch funds based on market conditions.
     

  • Lock-in Period and Liquidity

    When it comes to the lock-in period, it is essential that we also talk about the liquidity factors. ELSS funds have a lock-in period of three years; however, it goes up to five years if we look at ULIPs.

    Nonetheless, for ELSS funds, the policyholder can redeem their total matured amount at the end of three years, whereas in the case of ULIPs, one can only withdraw partial amounts of the matured fund.
     

  • Comparing Costs and Charges

    While investing in ELSS mutual funds, one has to incur certain expense ratios, which include the annual fees charged by the fund house for managing your investment portfolio. Additionally, if you buy or invest in equities through a broker or any online platform, you must consider the fee you pay them.

    Similarly, regarding ULIP plans, a premium allocation charge is deducted from your investment amount, covering the administrative and distribution charges. A significant part of your amount might initially go to these charges that affect your whole investment amount.

    Before investing in mutual funds, a policyholder must evaluate their choices and make learned and smart decisions about their money.

     

Conclusion
 

The comparison between ELSS and ULIP funds reveals a diversified investment philosophy. The ELSS funds reflect equity investments, whereas ULIPs are multifaceted instruments.
 

As you navigate the comparison, the dynamics of risk-tolerant, potential growth, liquidity, and allocation charges can help you map your financial plans.
 

This comparative analysis will help you guide your investment portfolio and gain maximum tax benefits. You could align this comparative analysis with your financial goals and optimise your wealth creation.

 

Get Flexibility to Choose from 10+ Fund Options with our ULIP

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Are the returns from ELSS and ULIP guaranteed?

No, the returns from both these mutual funds are related to the market risks and fluctuations, not offering guaranteed returns.

Does ELSS come under ULIP?

No, ELSS funds do not come under ULIPs. They are both different investment options and have their pros and cons.