ELSS Vs ULIP? Which would be the best option for the tax saving? Both of these products are designed for the tax saving. Both of these products invests in the equity market.
But, they have differences in many aspects. Both of these products are pushed by different class of people. An insurance agent must be canvassing for the ULIP while a financial planner would advise for the Equity Linked Saving Schemes. A lot of confusion is there. Many things are told for ELSS and ULIP. In this post I will try to put a clean and balanced picture of ELSS Vs ULIP.
- 1 The Buzz of ULIP
- 2 The Buzz of ELSS
- 3 ELSS Vs ULIP: Your Confusion
- 4 Look At Complete Picture
- 5 The Comparison of ELSS Vs ULIP on Certain Parameters
- 6 ELSS Vs ULIP: Your Decision
- 7 Conclusion
The Buzz of ULIP
I am sure, an insurance agent must have visited you after you start earning. I am sure, in most cases the insurance agent would be one of your relative or friend. I am also sure, the insurance agent must have persuaded you to ‘invest’ money in ULIP.
It happens with everyone. It happened with me as well. Every year in the month of January, any of my relative or friend asks to invest in ULIP. I am recollecting some positive points of ULIP told by the insurance agents. I assume you must have also heard these words.
- “The ULIP gives you maximum tax saving. You can save up to Rs 50,000 in a year, Further, At the time of maturity you need not to pay any tax on original amount and the return. “
- “You must have heard the ULIP is performing quite well. Can you think an investment which gives you a 50% return in a year. Suppose you did not get a return of 54%, even not the 40%, but 30%, it would also make you rich. At this rate, every year Rs 1 lakh investment would be Rs 8 Crore after 20 years. You can calculate it. I say, forget about 8 crore, if you get even 4 crore, That would be a very good return. “
- Suppose you talk about the high charges of ULIP. Let us hear what does the agent say about this. “You are right, Earlier the charges were very high. That is why IRDA has changed the rules. Now an insurance agent does not get a high commission. It has become very low now. You must have heard it in the news. IRDA is watching everything. How can a reputed company charge you exorbitantly, they need to run the business”
- Suppose you also inquire about the risk involved in the ULIPs. “I would like to tell you up front, this is not a fixed deposit. If you want to make a wealth, you need to take some risk. No risk, no gain. But ULIP is the only product which gives you a high return with less risk. Any time, whenever you wish, you can switch the fund. It means you can put your money in the debt funds. Debt funds are less risky. So, Whenever you think the share market is going down, you can switch the fund. You can switch without any cost. It is totally free. “
- “The best thing about the ULIP is, That you get the insurance with it. No other investment can give you high return with safety of insurance.”
- “The last thing. You are not locked here for 15 years like A PPF account. After 5 years you can surrender the policy. You will get your fund back. ”
The Buzz of ELSS
You would rarely meet a mutual fund distributor, who persuades for equity linked saving schemes. However, you can see large hoardings of equity linked saving scheme.
- You may encounter many articles, which tell the astounding return on the equity linked saving schemes (ELSS). The ELSS category gave 50% return in last one year. It has given 25% annual return in last 3 years. By all means these are the spectacular returns.
- You must be also aware of the lowest lock in period of Equity linked saving schemes among the tax saving options. IN a PPF account money is locked for 15 years. Tax saving FD and NSC has the lock in period of 5 years. But, ELSS is locked only for 3 years.
- Equity mutual fund charges maximum 2.5% of the fund value as the expense ratio. It seems not very costly. After all, the mutual fund company needs money to pay the fund manager and research team.
- Thanks to the SEBI rules. Mutual fund can’t charge any entry load. Exit load exists for early withdrawal. With the ELSS mutual funds, since you can redeem the investment only after 3 years, the exit load also does not exist.
ELSS Vs ULIP: Your Confusion
The Equity linked saving scheme seems better but very few people are talking about this. No one is there who can say with conviction that ELSS is the best tax saving option.
Whereas, the agent is taking guarantee of ULIP. He is giving the full assurance. He will be there to assist. It has given good return recently. Also, one can escape the market downturn. Insurance is free of cost.
On the other hand Financial planners are canvassing for the ELSS. There must be some substance in ELSS. Also, I have not to pay the heavy commission. It has given a very good return. The lock-in period is less. But I can’t switch in the meantime.
Lots of confusion! Let me clear all the confusion.
Look At Complete Picture
Perceived Vs Real Benefits of ULIP
The lock in Period
Since ULIP gives tax benefit, you can’t get your money back till 5 years from the start of the policy. But if you see the real life situation redeeming the ULIP just after 5 years is very rare. The reason is the fund value. ULIP takes high charges in the initial 5 years. The major part of agent commission goes from the premium of initial years. This results in reduced fund value. In most of the cases the fund value after the 5 years would be less than your total premium. In such situation, redeeming money just after the 5 years would result in loss. At that time the same agent would advise you to stay put into the ULIP for ‘real benefits’. Indeed, ULIP will give you satisfactory return only after the 10 years. Practically, you will remain locked at least for the 10 years.
Fund Switch Flexibility
This is the unique selling point (USP) of the ULIP. You have the liberty of switching the fund. You can opt to a less risky fund anytime. But, it is easier said than done.
The flexibility of switching to less risky investment is always there for the share market investor. Still, many novice investors lose the money. The money psychology plays its part and most of the times investor can’t switch the fund on time. Also, timing the share market is very difficult.
Do you consider yourself the share market expert, who can switch the fund on accurate time? If yes, then invest directly in the share market. Otherwise, the switch flexibility is a farce. Either you take greater risk for greater return or keep switching and get a low return.
Free Insurance cover
There are no free lunches. Dig deep into the charges of ULIP. There must be a mortality charge. This charge provides you the insurance cover. Every year money is deducted from your fund as mortality charge.
There is another negative aspect of this ‘free insurance cover’. This insurance cover gives you the illusion of being insured. While you remain under-insured. The insurance coverage given with ULIP might be insufficient for your family. Often, The insurance cover given with ULIP is 10-20 times of the total premium. Hence, if you want a cover of Rs one crore, you need a ULIP of the Rs 5 -10 lakh premium. Such a high premium is not possible for the person who earns less than Rs 20 lakh per year.
Long Term Return is Good
The performance of insurance funds are not bad. In the last 5 years the large cap equity insurance funds have given average 12% return. It is better than fixed deposit, but you are getting this return after taking the risk of equity.
Useful Calculator: Calculate ELSS Return of Selected Duration
Free Fund Switch
You must have heard the free switch of ULIP. It is not an extra facility. It should be free. Even mutual fund houses also give free fund switch option.
Perceived Vs Real Benefits of ELSS
The second biggest draw of the equity linked saving schemes are the high return. The average return of ELSS was 50% in last one year. It was 25% per year in the last three years. You can’t get such return from any tax saving option. But these returns don’t tell the complete picture. Let us take the average annual return of last 5 and 10 years. It was 14.5% and 17% respectively. You can see, in the long term ELSS is not such lucrative. The equity market is booming since 2014. It may go downward spiral for anytime. The ups and downs are the nature of share market. Therefore a short term performance of ELSS does not tell the complete truth.
The Lock In Period
An ELSS has the lock in period of 3 years. But there is no guarantee of a good return in 3 years. The market may go down during this 3 years. It may result a net loss to your investment. In such situation you would not like to redeem the ELSS investment. The share market goes with the cycle of ups and down. For a decent return you may have to wait up to 10 years. However, in the meantime, you can churn the investment to enjoy the tax benefit of ELSS.benefit of ELSS.
The Low Charges If ELSS
The ELSS charge maximum 3% expense per year. It is really less compared to ULIP. But this small expense ratio reduces the sheen of ELSS. In the longer term the ELSS gave 14.5% return. If it is not the expense ratio of 3%, the return would have been 17.5%. This would have made a great difference. However, the charges of equity linked saving schemes are low and it gives the highest return among tax saving instruments.
The Comparison of ELSS Vs ULIP on Certain Parameters
|Tax Saving||Totally tax free, Investment, the appreciation and maturity amount is not taxable.||It is also tax free similar to the ULIP|
|Return||The ULIP funds give better return than tax saving FD, NSC and PPF.||It gives the best return among all the tax saving options.|
|Charges||There are many charges e. g. administration charges, fund management charges, mortality charges, premium allocation charges. Charges reduce your fund value substantially in the initial 5 years.||An ELSS can charge maximum 3% (2.5% in big cities)|
|Insurance||Insurance cover is clubbed. But you may remain under-insured.||No insurance|
|Lock-In||5 years||3 years|
|Transparency||NAV is updated weekly. Portfolio information is available. But It is very hard to know about the fund manager of ULIP funds.||The net asset value (NAV) is updated daily. Portfolio and fund manager information is easily available.|
|Ease of subscription and Redemption||ULIP form is detailed. It takes almost a week to complete the subscription process. Redemption also needs more formalities. Online ULIP plans are easier to subscribe.||Buying ELSS through an online mutual fund distributor is very easy. After the first purchase, it becomes as easy as buying a share. You will get money within 3 working days of the redemption request.|
|Risk Aversion||You can switch funds to avoid the almost certain downfall of share market.||You can’t avoid market downfall during the 3 year lock-in period.|
ELSS Vs ULIP: Your Decision
The ULIP and ELSS are not the similar products. They have a totally different structure. You can’t compare the performance of ULIP with the ELSS. As, In the ULIP whole money does not go for the investment. ULIP gives you the insurance cover, but ELSS does not.
However, you can evaluate both the tax saving product on the basis of your need.
If You Want To Merely Save Tax
Often you consider ULIP Vs ELSS in the hurry of tax saving. However, there are other tax saving options which can be more suitable for you. If you can’t see your investment value going down, you should stay away from both of them. You should invest in ‘fixed income’ tax saving investments. These are the PPF account, Tax saving FD, NSC, senior citizen saving scheme and endowment insurance policies.
If You Want To Save Tax With Good Return
You want to save tax as well as build wealth for your child’s education and your retirement, the ELSS is the best option. Because, you stay put in the ELSS for longer term. In the longer term ELSS gives you the best return.
If You Want To Save Tax, Life Insurance Cover and Good Return
Again for tax saving and good return, you should opt the equity linked saving scheme. Whereas, for life insurance cover you must take an online term plan. The unit linked insurance plan (ULIP) also gives you all of the 3, but it may be deceptive for you. ULIP will neither give you adequate life cover, nor as good return as the ELSS.
You Want To Save Tax and Life Insurance Cover
The term plan is the best option in this situation. You should choose the best online term plan for yourself.
If You Want To Oblige The Insurance Agent
It seems nonsense, but happens sometimes. If the insurance agent is your brother in law, you are bound to take an insurance plan. He may be insisting for the traditional endowment plans, but you should settle for the ULIP or term plan. ULIPs are better than traditional endowment plans.
For most of the people I always recommend the equity linked saving scheme. ELSS are transparent, charges reasonable fees, easily understandable and investor friendly.
The ULIPs mix the insurance and investment. It promises to give you the benefit of both worlds, but it benefits only to the insurance agent and company. You never get the clear picture of your investment and insurance. You should avoid it.
It is all from my side on ELSS Vs ULIP. Now it is your turn to add on.