Should you invest in ELSS or Ulip to save tax?

Vidit is 25 and has started working only recently. He will be filing his tax returns for the first time this year. Since the beginning of the year, he has been receiving calls from advisers and agents, asking him to invest in an Equity-Linked Saving Scheme (ELSS) or Unit Linked In surance Plan ( Ulip). Both products are designed to save tax and have the poten tial to provide market-linked returns. Vidit feels that Ulips have an edge over ELSS funds since they offer life insurance bundled into the product. Is he making the right choice?

Ulips and ELSS are not similar products. They have totally different structures and fulfil distinct needs. While ELSS is a pure investment product, an Ulip’s primary objective is not to give investment returns but to offer insurance cover. Moreover, in Ulip, the entire amount is not invested. The charges (for administration, fund management, mortality and premium allocation) is high in the initial years, which will be deducted from the premium Vidit pays. This will effectively reduce his return at the end of the five year lock-in period. Therefore, while redemption at the end of five years may be “possible’, it may not be “practical” due to the lower fund value.

Also, Vidit may run the risk of being under-insured, unless he pays a high premium, as the sum assured is typically a multiple of the premium. Paying a very high premium may not be possible for a young investor like Vidit. The flexibility to choose the asset class he wants to invest in whenever he wishes to switch may prove to be of limited use as market timing may be difficult for an inexperienced investor.

As opposed to this, ELSS is a pure investment product that invests in equity and needs a longer holding period. If tax saving and investment are his objectives, then Vidit should opt for ELSS. Direct investment may further lower the cost incurred. If he is looking for life insurance, he may be better off with plain vanilla term insurance plans, which serve the purpose, provide maximum protection per rupee paid and are also cheaper.

(The content on this page is courtesy Centre for Investment Education and Learning ( CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)