ELSS vs ULIP: Which is better investment, tax saving option going into New Year 2019?

Every person wanting to invest in equity markets is confused between ELSS or ULIP, at some point. Both are long-term investment products that provide equity returns along with tax benefits. Since the investment is done in equities, both these products promise high returns but are also subject to market risks. Both Equity-Linked Savings Schemes (ELSS) as well as Unit-Linked Insurance Plan (ULIP) come with lock-in periods. They are designed for investors aiming for long-term investments. Even as both the products sound very similar to each other, their objective is very different. So, it is important to understand their purpose before investing the money. Here is a complete guide on ELSS and ULIP along with their tax benefits:

What are ELSS and ULIPs?

Equity-Linked Savings Scheme or ELSS is an investment product that puts your money in equity markets and at the same time helps you save taxes - both on the investment and the returns generated from these investments. The product comes with a high return potential but is only suited for high-risk tolerant investors.

Unit Linked Insurance Plans or ULIPs are products with dual benefit: Investment opportunity as well as insurance coverage. They invest a part of the premium paid in funds, while the other part is kept as life cover of the investor. They also offer death benefit to the investor. 

Kalpesh Ashar (Certified Financial Planner), Full Circle Financial, told Zee Business Digital that investors are not recommended to put their money in ULIPs because of the ambiguity involved, even as the product has been made more transparent in the last two to three years. 

"ELSS is a pure investment product. While in ULIPs, one part of your money is invested while the other part goes towards insurance. We don't recommend it to investors because of the ambiguity involved. But, in the last few years, it has been made more transparent which has improved the product. However, it is still an insurance cum investment product," he said. 

Lock-in period

Just like any other tax saving product, ELSS and ULIPs too come with a lock-in period. In the case of ELSS, the lock-in period is three years while for ULIPs, the investors have to stay in it for at least five years. Ashar believes that this is a huge disadvantage with ULIPs. 

"The disadvantage with ULIP is that you will benefit if you invest in it for a very long period. That too, if it has a larger equity share. Also, you have to stay in it for at least five years. It is better not to consider it purely as an investment option," he said while adding that ELSS is the lowest time duration product in 80C.

"But, this doesn't mean that you surrender after three years. The investors should try to maintain it in their portfolio. The advantage is that it becomes an open-ended product after three years," he said. 

Which gives better returns?

Tax Expert Sunil Garg explains that ELSS will always give better returns as only the fund management cost is reduced from the money paid and the rest of the amount is invested in funds. "So, it gives you better returns. In ULIPs, the fund manager will cut the cost of managing the fund, insurance cost, renewal fee as well as the agent fee. This reduces the funds available for investment which eventually, reduces the profit," Garg told Zee Business Digital. 

Tax benefits

Both these products are eligible for tax benefits under Section 80C of Income tax Act. Garg said that in 2018 budget, Modi government had introduced a new provision after which the investors have to pay 10 per cent long-term capital tax on returns from mutual funds. "But, if the long-term capital gain is less than Rs 1 lakh, you don't have to pay the tax," he added. 

In the case of ULIPs, if the premium paid is less than or up to 10 per cent of the policy amount, the amount received on maturity is not taxable, he said. "But, if this premium is more than 10 per cent of the policy amount or, the amount is withdrawn before five years, it will be taxable," Garg said. 

Risk involved

Amit Kukreja (SEBI registered investment adviser), Founder, AmitKukreja.com told Zee Business Digital that there is no black and white answer to it. He said that ULIPs can be designed in a way that they give exposure to small cap or medium cap funds. Similarly, they can also be designed in a way that they promise a certain sum assured.

Kukreja believes that investment and insurance should not be mixed. He said that investors should never opt for a combination product. "The important thing is given the complex structure in which ULIPs are designed, it is important to stay away from such product. Keep simple investment and simple insurance," he said. 

Explaining the payout structure of ULIPs, Kukreja said, "It can have staggered increasing sum assured per annum or it can have a flat sum assured on per annum basis. It depends on how the product is structured. Normally, an illustration is given to the customer which allows them to understand the payout structure."

Which product to opt for?

It totally depends on the investor's need. Garg said that ULIPs are more suited for those who don't want to invest much and want two benefits in the same amount. "Even some companies who want to give double benefits to their employees, opt for ULIPs," he added. 

Ashar thinks that even after the changes in ULIPs in the last few years, it is still an insurance cum investment product. "So, instead of this, we recommend term insurance plans as it gives a bigger live cover," he said while adding that it should not be considered just for investment purpose. 

Kukreja said that ELSS should always be the go-to option for investment purpose as they have a shorter lock-in period which makes then an open-ended product after three years. "Also, ULIPs are not as cost effective as ELSS," he added.