I am a novice in the world of mutual funds and stocks. In June 2007, I invested in a Unit Linked Insurance Plan (Ulip). Please tell me the difference between Ulip and ELSS. Was my decision good or bad?
Also, I want to start investing in mutual funds. I can start with Rs 4,000 per month and can stay invested for three years, but my risk appetite is very low. Please suggest a few options where I can earn moderately with lower risk.
- Rajan Sood
Firstly, do not mix up insurance and investments. These are two different products that serve different purposes. While Ulip is a mix of life insurance and investment offered by life insurance companies, ELSS is a type of mutual fund offered by mutual fund companies. Both are eligible investments under Section 80C of the IT Act and provide tax deduction on investment of up to Rs 1 lakh.
A comparison between a Ulip and an ELSS fund is given at the end of this answer. If at the time of buying the Ulip you perceived it to be an investment product, then you made the wrong choice. In fact, Ulips are not even smart insurance products. From the returns perspective, they are not the best of choices and so investors should stay away from them. In case you need life insurance cover then we would suggest that you go for term insurance. Term insurance is the cheapest form of insurance and caters to insurance needs in a better way than Ulips. In case you plan to exit Ulips before the completion of five years, then you shall be liable to pay tax on all the deductions claimed against the premium paid till the year of termination. You will also have to pay a high surrender charge.
Since you have a low risk appetite and can stay invested only for three years, consider investing in debt funds such as Fortis Flexi Debt or Canara Robeco Income. However, if you can take some risk on equity investments and are prepared to hold your investments for a longer tenure, consider investing a portion of your corpus in balanced funds such as HDFC Prudence, DSPBR Balanced or Tata Balanced.
This article was originally published on May 04, 2010.
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