ELSS vs ULIP – Which is better?
Though ELSS and ULIP are two different products, there is still confusion between the two among investors. The similarity lies in the fact that both of them are tax-saving instruments, but that is the only common thing between them. Apart from this, both serve different purposes – while ULIP is an insurance product, ELSS is an investment tool.
ELSS (Equity linked savings scheme) primarily invests in equity markets, ie; shares of companies. ULIP combines insurance with investment. A part of the invested amount goes into paying for the insurance, while the remaining portion goes into investment, which can be either debt or equity (depending on what the investor chooses).
In a ULIP, the premium that is paid gets distributed towards life insurance, administrative expenses and fees for the fund manager. The balances amount goes into investment. .So as you may have realized, the first priority of ULIP is insurance. ULIPs entail high first year charges (as high as 60 percent), which also include the agents’ commission. It is difficult to know what amount of premium is actually ‘invested’ in a fund. Compared to ULIP, ELSS is more easily understandable, there is transparency in terms of how the fund operates, the sectors or companies it invests in, the returns; etc. In ELSS, you pay a minimum fund management cost, which are 2 to 2.75 depending on what different fund houses charge.
In ULIP, you cannot redeem or withdraw your money for long periods of time. So, apart from lack of adequate transparency, you do not even enjoy the benefit of liquidity. Theoretically, ULIP may have a five-year lock-in period but you have to stay invested in a ULIP for ten to fifteen years, before you withdraw the money and get decent overall returns on the investment. You can withdraw from ELSS after a three-year lock-in period, which is not bad, at all.
As a cardinal rule, do not use insurance for investment. ULIPs may be an agent’s favorite because of high commissions that go up to 25 percent but it puts the investors at a disadvantage in terms of high costs, lack of clarity, difficult in monitoring and low liquidity. If you would rather invest in debt funds than equity, you can still consider ULIP. ELSS by their very nature, invests in equity products.
Investors need to bear in mind that over the long-term, equities as an asset class is a clear winner for wealth creation. It is also your best bet to beat inflation over a long-term. Ideally, the best way to go get the right blend of insurance and investment is to go for a term cover for life insurance and invest in a tax-saving ELSS fund for high returns with long-term perspective.