Is ULIP Better Than ELSS?
ULIP and ELSS are often compared as both the plans invest in capital market instruments. However while the ELSSs which are the equity linked savings schemes are pure investment schemes, the ULIPs or the unit linked insurance plans offer an investment and insurance combo. Many may seek to know what would it be better to buy a combo plan or buy the insurance and investment plans separately. Investments and insurance decisions need not be based on just this one criterion. Let us explore here more about ULIP and ELSS in order to make informed decisions regarding the purchase of investment and insurance plans.
The new structure of ULIPs
The ULIP structure had started acquiring rigidity and most ULIPs had started to lose ranks to the highly flexible ELSSs with actively managed portfolio yielding high double digit returns as well as hundred percent tax benefits. Under SEBI’s advice the asset management companies overhauled their existing ULIP structures or introduced new ULIP plans with greater flexibility and fund portfolio manageability than the earlier ULIP plans. The result is clearly visible in the recent industry ranking reports, the top ranking new structure ULIPs are offering annualized returns that match the returns of the top slot ELSS plans of 18% to 20 % above three years investment horizon.
Taxation of the ULIPs and ELSSs
Till the previous financial year the ELSSs were offering full tax benefits under sections 80C and 10 D of the income tax act. While the section 80 C tax deduction benefits still hold good for ELSS investments, changes have been introduced in section 10 D taxation of the ELSS schemes. Section 80 C provides for a maximum Rs 1.5 lakh tax deduction benefit on listed schemes and ELSS is among the listed schemes u/s 80C. The premium contribution in ELSS for the entire financial year can be deducted from the income. The maximum deduction can be Rs 1.5 lakh for the whole financial year
Till the previous financial year returns from ELSSs were completely exempted from taxation under section 10 D. From this financial year, the ELSS returns are being taxed under long term capital gains taxation if returns or yields are above Rs 1 lakh in a financial year from the ELSS schemes. However since ELSS continue to provide returns above 18%, even after LTCG taxation the returns remain above 16 %
ULIP schemes continue to offer the prior tax deduction and tax exemption benefits. The premium amounts invested in ULIP schemes for the financial year are deductible from the income up to Rs 1.5 lakh under section 80 C and returns earned from ULIP schemes are completely exempt from any kind of taxation under section 10 D.
ULIP and ELSS features
Comparison of ULIP and ELSS can be made on the following features:
Plan options: in comparison to ULIPs there exist a greater variety of plan options under the ELSS schemes. ELSS portfolio comprises purely of equity stocks, whereas ULIP portfolio comprises of sole equity, sole debt as well as the hybrid composition of debt and equity
ULIPs may offer a choice among four or five fund portfolio option, whereas ELSS schemes offer a much larger number of portfolio choices and catering to the spectrum of risk flavors is highly refined. The equities with different caps (namely the tiny, small, mid, large and very large cap) offer wide combination possibilities for ELSS portfolio construction. The top performing ULIP plans offer returns ranging from 10 to 20% depending upon the ULIP fund portfolio. The top performing ELSS plans under different risk categories offer returns ranging from 18 % to above 35 %
Lock in: the lock in period of ELSS is three years. After this tenure, an investor can choose to invest more or redeem ELSS units freely. Redeeming ELSS units before lock in has exit load charges. ULIPs can have lock in period of three or five years. ULIPs offer withdrawal or partial withdrawal facilities after lock in period gets over. ULIPs acquire paid up value and surrender value after three years
Cover: ULIPs provide life cover and life eventualities cover as well as investment growth. ULIPs propose to be total solution plans for life span. Eventualities cover are offered as options or riders and include health, accident, critical illnesses and disability cover riders. The policyholder can take up a ULIP plan for self as well as for the entire family.
ELSS plans do not provide life or eventualities cover, these are equity based mutual fund schemes that offer growth in investment. ELSS is an individual investment choice and does not include members, however ELSS holder can register nominee for the ELSS scheme
Cost: ELSS direct plans are more recommended over the regular plans as these can be purchased directly by investors, online, without the aid of an agent. The expense ratio of the direct ELSS plans is around 1 % to 1.5 %, while regular ELSS has an expense ratio of 2 % to 2.5 %.
ULIPs have a more complex structure than ELSS and hence the fund management chargers of ULIPs are on the higher side as compared to the ELSS, between 2.5 % to 4.5 %. Fund management charges of a ULIP plan reduces as the plan ages as mortality scaling and premium allocation charges reduce.
Plan flexibility: ULIPs offer plan variants with respect to the invested component portfolio and four free fund switches in a year and chargeable fund switches for more switches of around Rs 100 to Rs 250 per switch. In ELSS there can be no fund switches. An old ELSS may be closed and a new one started after the lock in.
If you are an investor with very low risk preference, you may invest in the secure ULIPs that invest mostly in debt based portfolios and offer life and eventualities cover as well. The secure ULIPs are at present fetching net returns within the 7%to 10 % range. If you are an investor with moderate risk preference who prefers to invest in ELSS offering returns in the 18% to 20 % range, then you may also consider the new ULIP plans which are offering returns of the same range and risk profile as well as life and eventualities cover. If you are an investor with high risk flavors then the ELSSs in the high risk category offering above 25 % annualized returns may be more apt for you.