Every year, when it comes to tax-planning, investors consider multiple investment products. At this time, Unit Linked Insurance Plans (ULIPs) and Equity-Linked Savings Schemes (ELSSs) are mentioned in the same breath. However, other than the fact that these two are tax-saving instruments, they are as different as chalk and cheese. While a ULIP is a mix of life insurance and investment offered by life insurance companies, ELSS is a pure investment fund. They are two different products that serve entirely different purposes. First up, it is important to understand that it is never wise to mix up insurance and investments. The basic purpose of insurance is to protect while the main purpose of investments is to generate returns. Intuitively, one would think that in order to achieve one purpose the other would need to be compromised.
ELSS invest a majority of the investment corpus in equities with an intention to generate higher long-term returns. These funds are transparent in terms of how they operate and where they invest, have predictable costs and easily understandable returns. The structure of ULIPs, on the other hand, is opaque and not easily understood. In the case of ULIPs, the premium paid is apportioned to many areas. Firstly, the charges towards life insurance (mortality charges) are deducted. Then comes administration expenses and fund management fees. Once this has been deducted, it is only the balance amount that is invested. This makes it difficult to compare the returns generated by ULIPs with other instruments. Additionally, your money will be locked-in for a longer period of time in the case of ULIPs.
The following table shows the important comparison between ULIP and Tax Saving Mutual Funds.
| ULIP | Mutual Funds |
Type of investment product | Investment and insurance both | Only investment vehicle |
Redemption | Only after the lock-in period of 5-years | Only after the lock-in period of 3-years |
Switching | An investor can switch between debt or equity and tax is not levied on this transaction | Switching is allowed only between a regular plan and a direct plan. Switching between funds is not allowed in the lock-in period |
Fees | Mortality charges, premium allocation charge, fund management charge and administration charges | No entry load, the annual fund management charges apply |
If you are looking to save tax by investing in a transparent instrument that can potentially generate good long-term returns then an ELSS would be the preferred option. However, if you are looking for an instrument that provides the dual benefit of insurance and investment, then you could opt for a ULIP. Before making a decision, to consult your financial advisor and assess the impact of your investment choice on your overall financial plan.
