The Indian mutual fund industry has witnessed exponential growth over the past decade, and in August 2023, valued its AUM (Assets Under Management) at around ₹46.63 trillion. Tax-saver mutual funds like ELSS mutual funds help investors earn higher tax-adjusted returns and are an attractive choice for investors looking to save on taxes while simultaneously growing their wealth.
What are the Differences Between ELSS and ULIP?
- ELSS funds and ULIPs offer varying tax benefits:
One of the primary reasons investors opt for ELSS and Unit-Linked Insurance Plans (ULIPS) is their tax-saving advantage. Indian investors can claim a tax exemption of up to ₹1.5 lakh annually under section 80C of the Income Tax Act. ULIPs offer dual benefits of insurance coverage and investment. The premiums paid towards ULIPs also qualify for deductions under Section 80C, and the maturity proceeds are tax-free under Section 10(10D). ULIPs have a mandatory lock-in period of five years.
- Investors must bear different charges for ELSS funds and ULIPs:
Another critical distinction between ELSS and ULIPs lies in the associated charges. ELSS mutual funds generally have lower expense ratios; hence the cost of managing the fund is relatively modest. ULIPs come with several charges, including premium allocation charges, fund management charges, policy administration charges, and mortality charges, which can significantly impact the overall returns on investment. Therefore, investors should carefully evaluate these charges before choosing between ELSS and ULIPs.
- ELSS funds and ULIPs offer various degrees of liquidity to the investor:
Liquidity is another critical factor to consider when comparing ELSS and ULIPs. ELSS investments come with a three-year lock-in period, which means that investors cannot redeem their units before this period. However, after the lock-in period, they have the flexibility to exit partially or fully as per their requirements. In contrast, ULIPs have a more extended lock-in period of five years, making them less liquid in the short term. Early withdrawals from ULIPs can result in penalties and may not be advisable for those in need of immediate funds.
- The lock-in periods of ELSS funds and ULIPs differ:
The lock-in periods of ELSS funds and ULIPs have already been touched upon, but it’s essential to emphasize their impact on investment decisions. If an investors wishes to leverage tax-saving opportunities and maintain higher liquidity in their investments, they must choose ELSS mutual funds. ULIPs, however, have a five-year lock-in period and combine the benefits of long-term investments and insurance coverage.
- ELSS plans and ULIPs offer different kinds of returns:
ELSS funds primarily invest in equities and equity-related instruments, aiming for long-term capital appreciation. Therefore, the returns generated by ELSS schemes are market-driven and subject to market volatility. In contrast, ULIPs offer a combination of investment options, including debt and equity funds, or even hybrid funds, allowing investors to choose based on their risk tolerance. This diversification can potentially reduce risk, but it may also limit the upside potential compared to pure equity focused ELSS funds.
Should investors opt for ELSS funds or ULIPs?
The choice between ELSS funds and ULIPs ultimately depends on the individual investor’s financial goals, risk appetite, and investment horizon. ELSS tax saver mutual funds are ideal for those seeking short to medium-term tax savings with relatively higher liquidity and are comfortable with market-linked returns. On the other hand, ULIPs are better suited for long-term investors looking for tax-saving options combined with insurance coverage and are willing to commit their funds for a more extended period.
ELSS and ULIPs are both viable tax-saving investment avenues in India, each with its unique features and advantages. Investors can make informed decisions that align with their financial objectives and risk tolerance, ultimately maximizing their tax-adjusted earnings and achieving their long-term financial goals by understanding the differences between the two.