ELSS vs ULIP: What is the difference between the two?

When it comes to financial planning, choosing an appropriate investment vehicle is crucial for achieving your goals. Two popular options in India are ELSS (Equity Linked Savings Schemes) and ULIP (Unit Linked Insurance Plans). Both offer tax-saving benefits under Section 80C of the Income Tax Act, 1961, but they cater to different investor needs. Read on for an in-depth comparison of ELSS vs ULIP, focusing on their features, advantages, fees, and suitability for different financial goals.

Table of contents

• What is ULIP?
• Key features of ULIPs
• What is ELSS?
• Key Features of ELSS
• ULIP advantages
• ELSS key features and advantages
• Fees and charges involved in ULIPs
• Differences between ULIP and ELSS
• Comparative analysis of ELSS vs ULIP

What is ULIP?

A Unit Linked Insurance Plan (ULIP) is a hybrid financial product that combines life insurance with investment opportunities. A portion of the premium paid goes toward providing life insurance coverage, while the remainder is invested in market-linked funds such as equity, debt, or hybrid funds.

Key features of ULIPs

• Combines life insurance with investment.
• Can invest in equity, debt, or hybrid funds based on risk appetite.
• Allows switching between funds to adapt to market conditions.
• Premiums paid are eligible for deductions under Section 80C of the Income Tax Act, 1961, and maturity proceeds are tax-exempt under Section 10(10D) of the Income Tax Act, 1961.

Mandatory lock-in period of five years. , with partial withdrawals permitted thereafter.ULIPs can be considered by individuals looking for a combination of insurance and investment with the flexibility to switch funds.

What is ELSS?

ELSS Mutual Funds, or Equity Linked Savings Schemes, are a type of mutual fund that invests primarily in equities and equity-related instruments. These funds are designed to offer high long-term growth potential along with tax-saving benefits under Section 80C of the Income Tax Act, 1961. ELSS has a shorter lock-in period of three years compared to other tax-saving instruments. This makes it suitable for long-term goals as well as medium-term goals. However, markets can be volatile in the short term, so an investment horizon of five years or more is usually recommended for equity mutual funds.

Key Features of ELSS

• Equity exposure: At least 80% of the portfolio is invested in equity instruments, offering the potential to build wealth in the long-term.
• Tax deduction: Investments up to Rs. 1.5 lakh per financial year qualify for tax deductions under Section 80C of the Income Tax Act, 1961.
• Short lock-in period: The lock-in period is three years, after which both partial and full redemptions are permitted.
• Market-linked returns: Offers potentially higher returns based on stock market performance but is accompanied by associated market volatility and risk.
• Diversification: Investments are spread across sectors and market capitalisations to mitigate risks.

ELSS mutual funds can be considered by investors with a relatively higher risk tolerance and a focus on wealth creation over the long term. It is also suitable for those who want tax benefits along with a relatively shorter lock-in period.

ULIP advantages

Dual purpose: ULIPs provide life insurance coverage along with investment opportunities.

Flexibility in fund selection: Investors can choose from equity, debt, or hybrid funds based on their risk appetite and financial goals.

Switching option: The ability to switch between funds allows investors to adapt their portfolios according to market conditions.

Tax efficiency: Premiums paid are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, and maturity proceeds are tax-free under certain conditions.

Long-term wealth creation: Designed for long-term goals like retirement or children's education.

ELSS key features and advantages

ELSS mutual funds stand out as one of the most popular tax-saving instruments due to their relatively short lock-in period and growth potential.

High growth potential: With significant exposure to equities, ELSS has the potential to deliver better returns compared to traditional investments.

Shortest lock-in period: The mandatory three-year lock-in period is shorter than other tax-saving options like PPF, ULIP or NSC.

Tax benefits: Investments up to Rs. 1.5 lakh per financial year qualify for tax deductions under Section 80C of the Income Tax Act, 1961.

Diversified portfolio: ELSS funds invest across sectors and market caps, reducing concentration risk.

Liquidity post lock-in: After three years, investors can redeem all or a part of their units without penalties or restrictions.

Professional fund management: Managed by expert fund managers who optimize portfolios for risk-adjusted return potential.

Fees and charges involved in ULIPs

ULIPs typically have the following charges.

Premium allocation charges: Deducted upfront from premiums before investing in funds.

Policy administration charges: Monthly or annual charges for maintaining the policy.

Mortality charges: Covers the cost of life insurance.

Surrender charges: Applied if the policy is surrendered before the lock-in period ends.

Switching charges: Some ULIPs charge fees for switching between funds.

Miscellaneous charges: Includes fees for changes like premium payment mode or beneficiary updates.

Differences between ULIP and ELSS

Feature	ULIP	ELSS
Nature	Combines insurance and investment	Pure investment product
Lock-In Period	5 years	3 years
Tax Benefits	Under Sections 80C & 10(10D) of the Income Tax Act, 1961	Under Section 80C of the Income Tax Act, 1961
Investment Options	Equity, Debt, Hybrid	Primarily Equity
Return Potential	Moderate (6%-12%)	High (12%-15%) (Past performance may or may not be sustained in the future)

Read Also: ULIP vs. mutual funds - Understanding the difference

Comparative analysis of ELSS vs ULIP

Suitability

• Choose ULIP if you need life insurance along with investment flexibility.
• Opt for ELSS if your primary goal is wealth creation with tax savings.

Risk appetite

• ULIPs allow you to balance risk by choosing between equity and debt funds.
• ELSS carries higher risk as it invests predominantly in equities.

Conclusion

The choice between ELSS vs ULIP depends on your financial goals, risk tolerance, and investment horizon. If you seek pure wealth creation with high growth potential and a shorter lock-in period, ELSS mutual funds can be a suitable choice. However, if you want a combination of life insurance coverage and flexible investment options tailored to your changing needs, a unit linked insurance plan might be more apt.

Ultimately, both instruments serve distinct purposes within a diversified portfolio. Assess your priorities carefully before deciding—whether it's maximising the return potential through equities or securing your family's future while building wealth over time.

FAQs:

What is the full form of ELSS?

The full form of ELSS is Equity Linked Savings Scheme.

What is the full form of ULIP?

The full form of ULIP is Unit Linked Insurance Plan.

Can I withdraw ELSS before 3 years?

No, ELSS investments cannot be withdrawn before completing the mandatory three-year lock-in period.

Is ELSS better than PPF?

ELSS offers relatively better return potential but carries more risk compared to PPF (Public Provident Fund), which provides fixed returns with minimal risk. Choosing between ELSS and PPF may depend upon individual’s risk appetite and preference.

Is ULIP a mutual fund?

No, ULIP is not a mutual fund; it combines life insurance with investments in market-linked funds like equity or debt.

Is ULIP better than mutual funds?

ULIPs provide insurance benefits along with investments but have higher charges compared to mutual funds like ELSS which focus solely on wealth creation.

ULIP or ELSS—which is better?

ELSS is suited for high-risk investors focused on wealth creation, while ULIPs cater to those seeking both life insurance and investment flexibility.

Are ULIP returns taxable?

ULIP maturity proceeds are tax-free under Section 10(10D) of the Income Tax Act, 1961, if certain conditions are met; otherwise, they may be taxed based on applicable rules.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.