Resources
Minus/plus icon
ResourcesExplore the full ACKO experience and make the most of your plan

Home / Life Insurance / Articles / Life Insurance Comparisons / ELSS vs ULIP vs Mutual Funds: Comparing Investment Options

ELSS vs ULIP vs Mutual Funds: Comparing Investment Options

Team AckoDec 6, 2023

Investing is an important part of financial planning that helps people grow their money over time. In India, there are three popular investment options: ELSS, ULIP, and Mutual Funds. Each of these choices has its own features and benefits. This article will explain the differences between ELSS, ULIP, and Mutual Funds, so you can make smart investment decisions.

elss-vs-ulip-vs-mutual-funds

Contents

icon

What is ELSS?

ELSS, or Equity Linked Savings Scheme, is a type of mutual fund that primarily invests in equities or stocks. It is specifically designed to offer tax benefits under Section 80C of the Income Tax Act, making it an attractive investment option for tax-saving purposes.

Key Features and Benefits of ELSS

  • Tax Benefits: ELSS investments are eligible for tax deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These deductions can significantly reduce an individual's taxable income.

  • Potential for Higher Returns: Since ELSS invests primarily in equities, it has the potential to deliver higher returns compared to traditional tax-saving options such as Fixed Deposits (FDs) or Public Provident Fund (PPF).

  • Lock-in Period: ELSS investments come with a mandatory lock-in period of three years. This lock-in period is the shortest among all tax-saving investment options.

Considerations When Investing in ELSS

  • Market Volatility: ELSS investments are subject to market risks. The value of the investment can fluctuate depending on the performance of the underlying stocks.

  • Lock-in Period: ELSS funds have a mandatory lock-in period of three years. Investors should be prepared to stay invested for the entire duration.

What is ULIP?

ULIP, or Unit Linked Insurance Plan, is a hybrid investment product that combines insurance coverage with investment opportunities. It offers policyholders the dual benefit of life insurance protection and potential wealth creation through investment in various market-linked funds.

Key features and benefits of ULIP

  • Insurance and Investment Combination: ULIPs provide life insurance coverage along with investment options, allowing individuals to secure their future and participate in market growth simultaneously.

  • Flexibility and Control: ULIPs offer flexibility in terms of premium payments and fund switches. Policyholders can choose from a range of fund options based on their risk appetite and investment objectives.

  • Tax Benefits: Similar to ELSS, ULIP investments are eligible for tax benefits under Section 80C of the Income Tax Act.

Considerations When Investing in ULIP

  • Charges and Expenses: ULIPs may have various charges, including premium allocation charges, policy administration charges, fund management charges, and mortality charges. Investors should carefully understand these charges before investing.

  • Lock-in Period: ULIPs have a lock-in period of five years, during which investors cannot withdraw their funds. This period ensures a long-term investment perspective.

What are Mutual Funds?

Mutual Funds gather funds from numerous investors and utilise them to invest in a varied collection of financial assets, including stocks, bonds, and money market instruments. These funds are overseen by skilled fund managers whose objective is to generate profits for the investors.

Key features and benefits of mutual funds

  • Diversification: Mutual funds provide diversification by investing in different types of assets, which helps decrease the risk associated with investing solely in one security.

  • Professional Management: Experienced fund managers oversee the management of Mutual Funds, utilising their expertise to analyse market trends, conduct thorough research, and make well-informed investment choices on behalf of the investors.

  • Flexibility: Investors can choose from different types of Mutual Funds based on their risk appetite and investment objectives, such as equity funds, debt funds, hybrid funds, and more.

Considerations when investing in mutual funds

  • Risk and Return: Different Mutual Funds have varying risk profiles. Investors should assess their risk tolerance and investment horizon before investing in specific funds.

  • Expense Ratio: Mutual Funds have an expense ratio that covers the operational and administrative costs of managing the fund. Investors should compare expense ratios across different funds to choose a cost-effective option.

Key differences between ELSS, ULIP, and Mutual Funds

Here are the differences between ELSS, ULIP, and Mutual Funds.

Key Factors

ELSS

ULIP

Mutual Funds

Investment Objective

Tax-saving and long-term capital appreciation

Insurance coverage and investment growth

Investment growth and diversification

Regulation

Regulated by the Securities and Exchange Board of India (SEBI)

Regulated by the Insurance Regulatory and Development Authority of India (IRDAI)

Regulated by SEBI

Lock-in Period

3 years

5 years

No lock-in period (except for specific schemes)

Tax Benefits

Eligible for tax deduction under Section 80C up to INR 1.5 lakh per year

Tax benefits under Section 10(10D) for maturity proceeds

Taxable as per applicable capital gains tax

Risk Exposure

High risk due to equity investments

Moderate to high risk depending on investment options chosen

Varies depending on the type of mutual fund

Insurance Component

Does not offer any insurance coverage

Combines investment and life insurance coverage

Does not offer any insurance coverage

Flexibility

Flexible investment options with SIP (Systematic Investment Plan) or lump sum investments

Flexibility to switch between funds and adjust insurance coverage

Flexible investment options with SIP or lump sum investments

Transparency

Portfolio holdings are disclosed regularly

Disclosure of fund performance and charges

Portfolio holdings and performance disclosed regularly

Charges

Usually lower charges compared to ULIPs

Charges include premium allocation, mortality charges, and fund management fees

Charges include expense ratio and exit load (if applicable)

Redemption Process

Redemption is allowed after the completion of the lock-in period

Partial withdrawals or surrender allowed after the lock-in period

Redemption is allowed at any time

Factors to consider when choosing between ELSS, ULIP, and Mutual Funds

1. Risk appetite and investment horizon

Consider your risk tolerance and investment horizon when selecting between ELSS, ULIP, and Mutual Funds. ELSS and equity-based Mutual Funds carry higher market risks, while ULIPs provide insurance coverage alongside investments.

2. Flexibility and control

Evaluate the flexibility and control offered by each investment option. ELSS and Mutual Funds generally provide more flexibility in terms of investment amounts, fund switches, and redemption options compared to ULIPs.

3. Financial goals and objectives

Align your investment choice with your financial goals and objectives. ELSS may be suitable for tax-saving and long-term wealth creation, ULIPs for insurance coverage with investment growth, and Mutual Funds for diversification and market participation.

Finding the right investment avenue for you

When it comes to choosing between ELSS, ULIP, and Mutual Funds, there is no one-size-fits-all solution. It's essential to assess your financial goals, risk appetite, investment horizon, and tax-saving requirements before making a decision. Consult with a financial advisor to understand the nuances of each investment option and create a well-diversified investment portfolio tailored to your needs.

Frequently Asked Questions (FAQs)

Here are some common questions about ELSS, ULIP, and Mutual Funds.

Icon

What is the minimum investment amount for ELSS, ULIP, and Mutual Funds?

The minimum investment amount varies for each investment option and specific funds within them. Generally, ELSS and Mutual Funds have lower minimum investment requirements compared to ULIPs.

Are ELSS, ULIP, and Mutual Funds suitable for short-term goals?

ELSS and Mutual Funds are better suited for long-term goals due to their potential for higher returns and market volatility. ULIPs may be suitable for short-term goals that require insurance coverage alongside investment growth.

Can I switch between different funds within a ULIP or Mutual Fund?

Yes, both ULIPs and Mutual Funds offer the flexibility to switch between different funds within the same investment option. This allows investors to reallocate their investments based on changing market conditions and investment objectives.

Do ELSS, ULIP, and Mutual Funds offer guaranteed returns?

ELSS, ULIP, and Mutual Funds do not offer guaranteed returns as their performance is subject to market fluctuations and the underlying assets' performance. Investors should be prepared for market risks and potential fluctuations in the value of their investments.

How can I track the performance of ELSS, ULIP, and Mutual Funds?

You can track the performance of ELSS, ULIP, and Mutual Funds through various means, such as the respective fund houses' websites, financial news portals, and investment tracking platforms. These platforms provide detailed information about fund performance, historical returns, and portfolio composition.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.

icon

Want to post any comments?

icon

Life insurance is about to get a whole lot better with ACKO

The only insurance you need for your life's changing needs

Starting at ₹534/month*

A product of ACKO Life Insurance - ARN: L0021

quote icon

Get Quote

quote icon