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Which is better: ELSS or ULIP?

While ULIPs and ELSS are both tax-saving options, only one of them makes sense as an investment


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Functionally, there is nothing common between Equity Linked Savings Schemes (ELSSs) and Unit Linked Insurance Plans (ULIPs). It is a basic rule to not mix up insurance and investments. ELSSs and ULIPs are two different products that serve different purposes. While a ULIP is a mix of life insurance and investment offered by life insurance companies, ELSS is an equity fund. Both are tax-saving investments, but the similarity ends there.

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ELSS have predictable costs, easily understandable returns and are transparent about how the fund operates and what it invests in. Not so with ULIPs. From the premium paid, the insurer deducts charges towards life insurance (mortality charges), administration expenses and fund management fees. So only the balance amount is invested. ULIPs have high first year charges towards acquisition (including agents commissions). In order to evaluate the return generated by a ULIP and thus compare it with another investment, you need to take into consideration only that portion of the premium that is invested in a fund. However, you cannot access this information very easily.

In a ULIP, the mix of investment and insurance prevents savers from having a clear cost-vs-benefit understanding of either of the two components. Further, your money is locked for a longer period of time. Thus, you sacrifice both transparency and liquidity. In theory, ULIPs have a five year lock-in, but since terminating the policy early affects returns adversely, in effect it is a ten-to-fifteen-year commitment. The high costs, difficulty in evaluation, lack of transparency and low liquidity doesn't make ULIP a suitable investment vehicle.

On the other hand, ELSS funds provide both tax-saving benefits as well as higher returns from equity investments, and so are preferable as an investment option. If you also want a life cover, go in for pure term insurance rather than a ULIP.

 
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