ELSS (Equity Linked Saving Schemes)
It loosely lies in the category of mutual funds. It primarily invests in shares of the companies. According to the guidelines, the Fund Manager has to invest 80 % of the money in the equity market, and the rest 20% can be go into bonds, government securities, debts and debentures. Whenever a person invests in ELSS, the money gets blocked for a minimum period of time, generally three years. This is considered as a popular option while making investment keeping in mind the tax saving opportunities. So, these are also known as tax saving mutual funds.
Tax Benefits
This tax saving mutual fund is covered under the section 80C, so a person can invest a maximum of 1lakh in it which will be reduced from the person’s taxable income. But, apart from saving taxes they can also generate decent returns for the investors. ELSS along with ULIP is the only investments left under section 80C which gives market competitive returns. People may consider PPF, but the very long lock-in period of 15 years makes it a disheartening option.
Disadvantages
ELSS is the riskiest investment among the other investments that have tax exemptions under the section 80C like life insurance, PPF, NSC, etc. The other important point is that there is a lock in period of 3 years, which means no one can liquidate it before that period. So, in case of though predictions, the investor may feel helpless if the ELSS is still in its lock-in period.
DTC Issue: With introduction to the Direct Tax Code, the tax benefits of this scheme can be phased out. But it is just a draft bill and still not a law. So, investors can enjoy its tax benefit for at least for this financial year.
There are generally three types of ELSS with growth options, dividend option and dividend reinvestment option. Some of the top performing ELSS in the markets are:
- Canara Robeco Equity Tax Saver
- HDFC Taxsaver
- Sahara Tax Gain
Unit Linked Insurance Plan (ULIP)
ULIPs basically are similar to mutual funds with an added life insurance cover. The premium paid is divided into two parts, one used for investment purpose and other for the cost of insurance cover. It is generally favorable for a longer period of 10 years and acts like a mix of saving, investment and insurance scheme.
It is also a market linked growth and both returns and the risks are in tandem with the performance of capital market. But most of the Unit Linked Plans offers an option of choosing the portfolio between equity, debt and balanced. So, one can decrease the risk involved in the equity market and go for the investment largely dependent on government bonds.
THE BETTER OPTION
If we go into the comparison of two schemes, then there may be conflicting opinions over which is the better option. Few comparisons:
- Objective:
ULIP is primarily an insurance scheme and then an investment or tax-saving tool. ELSS on the other hand is primarily a mutual fund which has a primary objective for tax saving.
- Category:
ULIPs are rolled out by insurance companies and are regulated by IRDA. While the other is given by MF companies and is regulated by SEBI
- Lock-in Period
Both have similar lock-in periods of around 36 months. But, Unit Linked Scheme are not a sensible option for such a small period.
- Charges Involved
This is a field where ELSS scores an ace as the charges levied on it are very low( around 2-2.5 %) in comparison to the ULIP-funds which deduct 30-35% of premium as charges.
- Returns on investment
ELSS is a clear winner with higher returns as more amount of money is invested in the equity markets. But the risks are also high.
- Tax-benefits
Both have a tax exemption of up to 1 lakh under section 80C
The better option completely depends on the need of the investor. If someone wants to invest the money solely for the tax-saving purpose, then ELSS is surely a far better option with very low charges involved and a shorter time period.
But if a person has low appetite for risk, then a balance ULIP-scheme would be beneficial for him as a tax saving scheme. Also, if someone is looking for a diverse investment as a component in the financial planning which will give him multiple benefits of having a saving scheme, which also gives market driven high returns to some extent along with a life insurance cover , ULIP is a better choice.
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