According to investment mogul Warren Buffet, “Never depend on a single income, make an investment to create a second source”. The advice is relevant for everyone, regardless of the fact that you are an investor, or have just started working. However, when it comes to choosing investment, many beginners face a challenge in figuring out the right investment option for themselves. Two of the most contemporary investment products available in the market are Unit Linked Insurance Plans (ULIP) and Equity Linked Saving Schemes (ELSS). Despite being effective investment options, people commonly get confused while choosing them, mostly due to misinformation and lack of adequate knowledge. Considering these problems, it is important to be able to discern between both these investment options, as they are used for vastly different purposes. Let’s look at both of these options one by one:
What is a ULIP?
Unit Linked Insurance Plans or ULIPs are a versatile insurance alternative because on top of providing insurance, they also act as an effective weapon in the arsenal of your investment portfolio. While normal insurance policies provide a life-cover, ULIPs enhance your income by acting as a fruitful investment opportunity which can provide higher returns on a long-term basis.
What is an ELSS?
Equity Linked Saving Scheme or ELSS is a unique investment tool that provides you tax benefits while also helping you significantly grow your corpus. An ELSS is considered a powerful investment instrument as it derives income by investing in the equity market over a long-term. Moreover, many ELSS alternatives also allow the investor to select the risk category of investment, making ELSS a favourite for seasoned investors.
Most people get confused between both of these options as they are both long-term options that are tax-saving in nature. However, to clearly identify their nature, lets discuss the advantages of both these investment alternatives:
Benefits of ULIP
Extensive Life-cover
In addition to an investment option, a ULIP can provide you an extensive life cover, mainly known as life insurance. Such an investment options is ideal for life-insurance and other linked alternatives like child insurance plans and retirement planning options. By providing life-insurance, an investor can be assured that in the event of death, he/she does not require to pay premiums and will be able to receive the full investment amount with the added benefits.
Flexible Payment Options
As ULIPs are a type of insurance, you are required to pay premiums to invest in one. However, many companies provide the option of either paying lump-sum amount as investment, or the ability to pay regular premiums for availing its benefits. While most people opt for regular premiums, paying a lump-sum amount is good if you have accumulated funds for investment.
Choice of Investment Type
BY investing in a ULIP, you can divert your funds towards equity funds, debt funds as well a hybrid of both that is commonly recognized as a balanced fund. While equity investments are targeted towards stock market investment, debt-focused ULIPs park your money in debt instruments. When you are trying to choose the best ULIP plans for your investment portfolio, you can opt for a balanced fund if you are unclear about your choice, or prefer to divide your risk.
Emergency Withdrawal
When you invest in a ULIP policy, you are provided with an option to partially withdraw your money for meeting emergency needs or to fund current needs like paying school fees or settling ongoing dues. In most cases, opting for a partial withdrawal comes with minimal or no penalty.
Save On Taxes
According to the Income Tax Act, 1961, you can avail tax benefits under the section 80C on premium payments and also avail benefits of policy maturity under section 10 (10)D. Further, you can also switch between different debt and equity funds without incurring any extra charges.
Goal-Oriented Investment
Being a long-term investment option, you can invest in a ULIP policy to cover your financial goals like your child’s higher education, marriage expenses, as well as home renovation. Furthermore, most ULIP providers help you invest through investment calculators that distinctly shows your investment amount on maturity.
Benefits of ELSS
Definite Long-Term Investment
While some investment alternatives allow the investor to withdraw their amount after a short period of time, ELSS funds help you in letting your corpus grow on a long-term basis. Any investor willing to indulge in a healthy long-term investment can be ensured about their funds as this lock-in period brings in a healthy investment habit.
Planned Equity Investment
Regular equity investment requires you to be in constant vigilance of the stock market trends. However, ELSS eliminates your concerns by parking your investments funds in a desired category of equity funds. The added benefit of investing in a specialized portfolio of equity stocks can provide a significant boost to your funds as the average rate of returns for ELSS funds is close to 8%.
Save Taxes
The words ‘save taxes’ rings a bell with every investor. Through long term investments, ELSS provides a distinguished benefit of availing tax benefits under/section 80C of Indian Income Tax Act, making your returns on the investment tax-free. Furthermore, by investing in ELSS funds, an amount of up to INR 1,50,000 can be deducted from your taxable income.
Invest Perpetually
While other similar investment options like fixed deposits and Public Provident Funds (PPF) come with a set maturity date, ELSS investment do not have a set maturity date. This means that until you require your invested funds for other purposes, you can keep re-investing your money indefinitely, thereby raking up high returns.
Diverse Portfolio of Funds
Every seasoned investor prefers flexibility and choice when it comes to choosing investments. By offering a wide range of investment options, ELSS funds allow the investor to tweak their investment in ELSS by offering fund-types that come with different levels of risk. With an ELSS, one can indulge in large-cap, mid-cap, as well as multi-cap investments that provide ultimate flexibility.
No Age Limit
One of the distinct advantages of investing is ELSS is that any individual with a bank account can invest in ELSS funds. If you are an individual who has recently started earning, ELSS allows you to make investments starting from INR 500, making it extremely easy to invest. On the other side of the spectrum, there is no upper-limit in age when it comes to ELSS, which means that if you are able to bear the risk, you can definitely invest in one.
Who Should Invest in ULIP?
By considering the various advantages of ULIPs, people interested in a safe long-term investment should invest in ULIP funds. Furthermore, people investing with a specific goal in mind i.e. child education or retirement planning can opt for financial products that are specifically designed for that purpose, which are included in ULIP investments. Also, as ULIP is a low-risk alternative, people who are not much familiar with investment dynamics and nuances can also invest in ULIP for long-term investment. Furthermore, if you are investor willing to diversify their portfolio, ULIP is an attractive long-term investment option that provides flexibility in choice of equity fund types as well.
Who Should Invest in ELSS?
As ELSS does not provide life-cover, it should definitely be a highly sought-out alternative for ardent investors. By providing phenomenal tax benefits (the complete income from it being tax-free), ELSS is considered highly profitable for investors. Additionally, the flexibility of choosing large-cap/mid-cap alternatives and the high-risk nature of ELSS funds make it very clear that ELSS options are built keeping investors in mind. Considered a type of mutual fund investment, it presents itself as a high-risk-high-reward alternative that investors would prefer in their portfolio.
FAQs
Q1. How can I pay my ULIP premiums?
There are multiple ways to pay your ULIP premium like direct debit, online payment, POS payment, mobile applications as well as a visit to your local bank branch.
Q2. How can I check my ULIP policy renewal?
The various ways of checking your renewal status is by visiting the website of the ULIP providers, through SMS communication, and also by visiting the local office/branch.
Q3. What is the maximum I can save on taxes by investing in ELSS?
By investing an amount of 1.5 lakh, you can save up to Rs 45,000 every year when you invest in ELSS.
Q4. Are there other methods of Investing in ELSS?
While there are different types of ELSS fund options, you can also invest in an ELSS through SIPs which come with additional advantage of compounded long-term returns and rupee cost averaging.
Q5. What is the lock-period for ULIP and ELSS?
While you can withdraw your ELSS investment after 3 years, an investment made in a ULIP fund cannot be withdrawn before 5 years after investment.