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Is ELSS Better Than ULIP?

Updated On Sep 21, 2021

ELSS mutual funds and ULIPs are two very distinct types of mutual funds that serve the same function. To choose between the two, you must match your financial objectives and aspirations to the plans and choose the one that best suits you.

ELSS is an equity mutual fund that is diversified. The fund invests in the stock market and picks companies with various market capitalizations. An investor can claim a tax deduction of up to Rs 1,50,000 for ELSS investments made in a financial year. A three-year lock-in period is required for certain investments.
Whereas, A ULIP is a combination of investment and insurance plans in which one portion of the investment is utilized to ensure the investor and the other part is invested in the investor's preferred products. ULIPs allow investors to invest in equities, debt, hybrid, or money market funds. These investments have a five-year lock-in period. During the course of an investment, an investor might opt to switch from equity to debt or hybrid, depending on their investment objective.

Variations Between ELSS And ULIP

Let's take a look at few variations between ELSS And ULIP:

1. Lock-in Period

ULIPs have a five-year lock-in term, whilst ELSS investments are locked in for three years. While you cannot cancel the ULIP, you can stop paying the premium, in which case you will be charged a discontinuance fee and the remaining balance will be transferred to a discontinuation fund. There is no exit load with ELSS funds because you can't withdraw before three years. Even after the lock-in period, it is not wise to exit a ULIP or an ELSS fund because equity investments provide the best long-term returns (7-10 years). This interval should preferably be 10-15 years in the case of ULIPs.

Must read: Do ULIPs Allow Partial Withdrawal?

2. Changing Options

ULIPs has a switch function, which allows you to change the proportion of money invested in different funds (equity, debt, hybrid, etc). This allows you to adjust your investments based on your risk tolerance at different phases of life. So while you are young, you can have a larger amount of equity, but as you get older, you may find yourself in debt. If you believe the markets will fall, you can also exit stocks. However, keep in mind that there may only be a limited amount of free swaps available. In the case of ELSS, there is no such choice, and the investment cannot be touched until the lock-in term expires. You can, however, choose the dividend option to ensure that earnings are booked on a regular basis.

3. Tax Treatment

Section 80C allows for a deduction of up to Rs 1.5 lakh on both instruments. The EEE mode is used by ELSS funds, which means that the investment, capital gains, and maturity amount are all tax-free. This is due to the three-year lock-in period, which results in long-term capital gains that are tax-free for stock investments. In the case of ULIPs, if you surrender before the lock-in term, any prior deductions will be reversed, and you will be required to pay tax. Only when the policyholder dies is the maturity amount tax-free. The maturity funds are added to the life assured's income and taxed at the applicable rate if the premium is greater than 10% of the sum assured.

4. Charges And Transparency

The fund management fee, often known as the expense ratio, is the only cost associated with ELSS funds. This is roughly 3%, and the cost is factored into the scheme's NAV rather than being charged separately. This means you can calculate your return and know exactly how much money was invested, resulting in excellent transaction transparency.

The premium allocation charge (percentage of the premium for charges before allocating units, initial and renewal expenses, and agent commissions); mortality charge (insurance cost); fund management fee; policy administration charge; fund switching charge; and service tax deduction are all incurred in the first few years of ULIPs.


If you're looking for tax advantages and don't mind your money being exposed to the market, an ELSS is a better option. ULIPs, on the other hand, are basically insurance products that are ineffective as investment vehicles. Any investor who keeps these two components separate and chooses a plan that fits their goals and risk profile will do well.

Also Read: The Best ULIPs To Invest In 2021

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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