ELSS v/s ULIP: Which is better for your portfolio?
What's the story
Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) are two popular investment options in India. Both come with tax benefits under Section 80C of the Income Tax Act, but they differ in terms of risk, returns, and liquidity. Knowing these differences can help you make an informed choice based on your financial goals and risk appetite.
#1
Understanding ELSS
ELSS is a mutual fund scheme that invests a minimum of 65% of its corpus in equities. It has a lock-in period of three years, which is the shortest among tax-saving instruments. ELSS funds have the potential for high returns due to equity exposure but also come with higher volatility. Investors should be willing to stay invested for the long term to reap the benefits of compounding.
#2
Exploring ULIPs
ULIPs are insurance products that also offer an investment component. A part of the premium goes toward life cover, while the rest is invested in equity or debt funds as per the investor's choice. ULIPs have a minimum five-year lock-in period but offer more flexibility in terms of switching between funds. However, they also come with higher costs due to premium allocation and policy administration charges.
#3
Comparing returns and risks
While ELSS has the potential to deliver higher returns over the long run owing to its equity exposure, ULIPs may give moderate returns depending on the fund's performance. However, ULIPs are less volatile as they can invest in debt funds too. However, both come with risks as market conditions can affect fund performance.
Tip 1
Liquidity considerations
ELSS has a three-year lock-in period, which means investors cannot withdraw their money before this period ends. ULIPs, on the other hand, have a five-year lock-in but allow partial withdrawals after the first five years, subject to certain conditions. This gives ULIPs more liquidity options than ELSS while still maintaining a long-term investment approach.