ULIP vs mutual funds – Differences and Comparisons

There are many schemes in the market offering lucrative benefits and promising high returns. Unit Linked Insurance Plan (ULIP) and Equity Linked Savings Scheme (ELSS) are some of the most popular tax-saving financial products, possessing distinct characteristics and benefits.

  • Unit Linked Insurance Plans (ULIPs) are financial products that provide both insurance and investment benefits under a single plan. These are long term investments that provide returns linked to the market besides life coverage.
  • Equity Linked Savings Schemes (ELSS) is a mutual fund investment scheme that pools a major portion of its funds into diversified equity or equity-related schemes. ELSS are high-risk instruments offering high returns, which are popular because of underlying tax benefits.

Key differences between ULIP and ELSS

Criteria           ELSS ULIP
What is the basic objective?                   ELSS invests in diversified equity funds ULIP offers both insurance cover and market-linked returns
Who issues this instrument?   Offered by mutual fund companies Offered by insurance companies
What is the average rate of return?                       Based on a random sample of ELSS funds, the average rate of return in the long term has been around 11% to 15%, sometimes higher. However, returns are subject to market conditions Based on a random sample of ULIPs, the average rate of return has been around 7% to 11%, sometimes higher. However, returns are subject to various conditions
Is there any lock-in period?           The lock-in period is 3 years There is a lock-in period of 5 years
Is switching allowed?            No switching between funds is allowed Switching between funds is allowed; the number of switches permissible per year depends on the company
Are there any tax benefits?         Invested amount is tax exempt; only annual returns exceeding INR 1 lakh are taxed at 10% as long term capital gains (LTCG) Premiums paid are exempt from tax, but returns will be taxed
Who is the regulator?      Securities and Exchange Board of India (SEBI) Insurance Regulatory and Development Authority (IRDA)
What is the transparency level?    ELSS has more transparency, as investors can select equity options These are less transparent, as fund managers make investment decisions

Key takeaways

  • ELSS tends to be ideal when you want to invest in mutual funds and save tax at the same time. It has greater transparency and liquidity when compared to a few other investment avenues.
  • ULIP could be preferable when your long-term financial goal is wealth creation along with life coverage. It has more flexibility in terms of switching between funds such as debt, equity, hybrid, balanced, etc.

Both ELSS and ULIPs have their pros and cons. Your objective should align with the benefits of the product. When it comes to selecting an ideal investment product, you could seek out expert guidance. If your goal is to build wealth to meet short- or long-term goals, you could explore other mutual fun investment options or stock with a financial expert.

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