Saturday, March 7, 2009

ELSS V/s ULIPs- Which one is better?

Friends, this being the tax saving time for us in India, there are quite a few who want to know the difference between ULIPs and ELSS as an investment option since both of them offer the option of equity exposure and tax saving under Sec 80C of the Income Tax Act. So here will try and explain the various aspects of both the products highlighting the notable differences of the two so that you can make your investment decision wisely.
1.TYPE OF FUND
A. ULIP- ULIP or Unit Linked Insurance Plan is primarily an insurance product as is evident from its name itself. It offers you the option to invest your money in debt,equity or mixture of debt and equity funds.
B. ELSS -ELSS or Equity Linked Savings Scheme is primarily a mutual fund scheme run by Mutual fund companies. It offers you the option to invest your money in equity only. No option to invest in debt funds here.
2. OFFERED BY
A. ULIP - Sold by Insurance companies only.
B. ELSS- Sold by mutual fund companies only.
3. LOCKIN PERIOD
A. ULIP- Lockin for ULIPs is 3 years.
B. ELSS - Lockin for ELSS too is 3 years.
4.CHARGES
A. ULIP - Charges are very high . Companies charge as high as 30-35% of the premium as charges. It is higher in initial years and then subsequently gets reduced.
B.ELSS- Charges are comparatively lower in ELSS at 2-2.5% of the investment made. The charges are generally flat.
5.INSURANCE
A-ULIP- It has to have insurance component besides investment.
B.ELSS- It may or may not have that.Most of the popular ELSS in the market today dont have it.
6.RETURNS
A. ULIP- Returns in ULIP schemes are much lower as compared to ELSS . Though the actual return is a function of the market, it is safe to assume that ULIPS over 10-15 years time frame will give 8-9% returns for equity fund.
B. ELSS- Returns for ELSS schemes are superior to ULIPS. They too are dependent on market forces but it is safe to assume a return of 12-% on well diversified equity fund over a period of 0-15 years.
7.TAX BENEFITS
A. ULIP- RS 100000 under Sec 80C.
B. ELSS- RS 100000 under Sec 80C.
8.WITHDRAWALS
A. ULIPS-Generally possible after the maturity of the plan. Some plans may allow some withdrawals at specific time intervals. Check the individual policy details .
B. ELSS- Withdrawals may be done any time after 3 years of investing the fund.
SO WHICH ONE IS BETTER? Now Lets answer the basic question. In my opinion , ELSS is the clear winner over ULIPs simply because:
- ELSS has low charges as compared to ULIPs.
- Offers much superior returns in long term due to its low cost structure.
-Offers you the same tax benefit as well.
So, hope to have answered your question on this one.
Stay wise and happy investing....



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