ELSS versus ULIPs: Which is the better.
One of the big debates about tax saving investment is the unit linked insurance scheme (ULIP) versus the equity linked savings scheme (ELSS) debate. There are some similarities and some differences too. Both ELSS and ULIPs give you an access to equities and both entail a lock in. Also in terms of loading and costs there is a distinct difference between ELSS and ULIPs. So how should one take a decision?
How ULIPs became a victim of mis-selling over the years? ULIPs have an interesting history in the Indian markets. To begin with, most investors did not realize the difference between a ULIP and a mutual fund. Above all, the methodology of charging them was not too transparent. Union Budget 2018-19, it is believed, could give ULIPs some hope of a revival. The imposition of the 10% tax on long term capital gains (LTCG) earned on mutual funds could be a trigger for ULIPs. Remember, ULIPs have been exempted from the ambit of LTCG tax and that will only be applied to direct equities and equity mutual funds.
There are 4 reasons why ELSS could continue to be the tax saving instrument of choice
A good investment product is defined by its transparency with regards to the loads, initial costs and the transparency of the portfolio. ULIPs really do not cover themselves in glory. Data about ULIPs is not as widely available and tracked as compared to mutual funds. Hence, it is difficult to find the best performing ULIP suitable for you.
Should you buy ULIPs because it combines insurance and investment? That is never a great idea fundamentally. From a financial planning perspective it is always better to keep your insurance and investments separate.
A logical corollary to the previous point. When you buy ELSS and a term policy, remember that both are eligible for exemption under Section 80C of the Income Tax Act. So you are really not losing out on anything.
You need to ask yourself a more fundamental question. Will there really be a major impact on your returns. Mutual Funds have consistently delivered good performance over the last 20 years.