Equity Linked Saving Scheme (ELSS Funds)
ELSS Vs ULIP
As we saw earlier, there are numerous financial instruments that are eligible for deductions under section 80 C, such as ELSS, NPS, PPF, ULIPs and more. A word of caution here: Many investors sometimes get confused between an ELSS and Unit Linked Insurance Plan (ULIP). While both of them offer tax deductions under section 80C, they are completely different from each other in terms of their product features and risk-return profiles.
Here are certain differences which will help you to distinguish between the two:
- ULIP is an insurance product offered by insurance companies while ELSS is a mutual fund.
- ULIP is a hybrid product, offering features of both insurance and investment. ELSS is a pure investment product which does not provide any insurance coverage.
- ULIPs generally deduct a hefty amount from the amount invested as various charges like fund management expenses, life insurance charges and various administrative fees. Whatever amount remains after this deduction is invested in the equity markets. However, in the case of ELSS, the entire amount gets invested in the equity markets without any deductions.
- Though ULIPs can offer an expected return of 8 to 10%, the time taken to generate the returns is much longer than that of ELSS. This is because the investor starts getting returns only after the initial charges that are deducted by the insurance company get recovered.
- While the performance of ELSS funds is quite easily understandable, it is often notoriously difficult to understand how the ULIPs behave. In the past, countless investors have complained about not getting satisfactory returns from a ULIP even when the markets have performed well.
Many investment advisers may try to sell you ULIPs disguising them as equity investment products. We recommend you to choose an ELSS if you only want to invest in the equity markets and do not need any insurance cover. Do not invest in a ULIP just for saving tax u/s 80C.