ULIPs or ELSS ? These factors can help you choose the better option

ULIPs or ELSS ? These factors can help you choose the better option

As we enter the “tax planning” period from January to March, people look to invest in what is most suitable for them. However, understanding what is best is not just a matter of knowledge or investment communication from the company selling financial outputs. It requires a proper understanding of the product and objective measurement of the features of multiple products to gauge which one is becoming for you. Here are some factors that can help you draw connections between mutual funds (MFs) and unit-linked insurance goods (ULIPs).

Reason to scratch the facade

It is well-known that expenses charged by ULIPs are comparatively higher than those on MFs. Often, we are encouraged to invest in a combination of MFs and term insurance, which is cheaper. But you may like to damage the surface. ULIPs with higher expenses have been mis-sold to physiques; but if you know what parameter to stare at, then you can analyze for yourself. One of the ideas to not summarily reject ULIPs is that there is an inherent tax advantage. Apart from the tax savings under section 80C of the Income Tax Act, on properties of up to Rs 1.5 lakh, future returns from ULIPs are tax-free under section 10(10D). It goes facing the grain since insurance is not deemed to be an investment vehicle. In this case, the investments are evolving or coming back to you, free of tax. You get this tax advantage on investment because it is packaged with insurance. However, as a consumer of financial products, you have advantages. For comparison plans, tax benefit under section 80C is available in ELSS funds, but that is the only section of MFs eligible for 80C benefit. There are retirement extract funds in the context of 80C, but those are only some rare. In contrast, all insurance products suit section 80C. ULIP proceeds are tax-free under section 10(10D), presented the premium paid in a year is within 10 percent of the total assured. Keeping this in mind, insurers adjust the sum secured suitably while creating the product, except for the single premium items. Equity funds are subject to long-term capital increases at 10 percent above Rs 1 lakh, for a holding time of more than one year.

Circumstances for comparison

The most debated subject, in the context of a comparison between MFs and ULIPs, is the comparatively higher expenses charged by ULIPs. This is broadly correct; but, for objective measurement, you have to do some data digging. For MFs, the data is easily available; you just have to tour the fund house’s website, and the expenses imposed to all funds, daily, are available in excel construction. For ULIPs, the expenses are mentioned in the product brochure, but you have to search for them. And they do not come across as the account of expenses charged, but just as a mention in the article. In other words, while there are a few ULIP products with comparatively lower expenses, you have to hunt for those. Given that ULIPs are financing vehicles with an insurance wrapper, performance is important. In MFs, there are multiple equities, debt, and hybrid schemes, and the production data is easily available. In ULIPs, there are equity reserves – large, mid, multi-cap, etc. – and debt reserves – long maturity, short maturity, etc. The performance information is not as easily available as MFs, but it is reasonable to dig it out from certain third-party websites.

Why assets of corporate bond funds are growing

Investors stick to SIPs as selling pressure on equity mutual funds decreases the HDFC, Birla Sun Life NPS corporate debt funds deliver double-digit gains.

Again, NAVs of MFs are represented post-expenses, whereas the performance ULIPs (NAV to NAV) is provided pre-expenses. In most cases, the costs of ULIPs are higher than those of MFs. For a ranking of ULIPs based on cost and fund administration, you may refer to the CRISIL ULIP ranking report. It allows cluster ranks in categories such as equity large-cap or debt long-term. This will supply you with a perspective on what the relative standing of a product is, beyond groups of products ranked on a scale of 1 to 5.

Liquidity is one model you have to be mindful of. In MFs, liquidity is possible at any time. There are certain funds with exit obligations, but there is no positive lock-in, except in the case of ELSS funds. You can plan your liquidity by funding in exit-load-free MFs. In ULIPs, there is an opening lock-in, after which there is restricted liquidity available.

Conclusion

Provided you have the experience, ability, and inclination for data mining, you can objectively analyze products; it is possible in today’s digital age and information availability. Otherwise, if you are not satisfied with the costs or administration, or liquidity of ULIPs vis-à-vis MFs, it is more beneficial to go with the conventional wisdom and settle for MFs plus term insurance.