Life Insurance or Tax Saving Mutual Funds

Everyone yearns for two things primarily in their lives – growth and security. What if you can get both these things while utilizing your hard earned dime? Sounds lucrative, right? We are talking about certain insurance products which also offer you the leverage of getting your premium back by investing in both debt and equity market. But, in order to fully understand the investment context and benefits, we need to look at both sides of the coin by comparing it with traditional tax saving mutual funds.

There are certain insurance products which not only give you security but also cater your investment needs, ULIP is one of them. Which is why here we have considered ULIP for the perfect understanding of the comparison between life insurance and tax saving mutual funds or ELSS.

ULIP – Double edged sword for Insurance and Investment

ULIP or Unit Linked Insurance Plan is a combination of investment and insurance. It is linked to capital markets and it offers a combination of debt and equity investment along with the benefit of insurance. Thus, this product gives dual benefits. There are various plans that are devised under the ULIP scheme. Some of them include ULIPs for retirement, ULIPs for wealth creation, children’s education, and so on. ULIP schemes were launched in 2001 post the Government of India allowed foreign investment in the insurance sector. The scheme also allows tax benefits wherein individuals investing in the same can get the tax deduction of up to ₹1,50,000. The following are the best ULIP Plans in India:

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Best ULIP Plans in India

ULIPReturns for 3-years (in %)
HDFC Life Pro Growth Plus-Opportunities Fund19.40%
SBI Life- Unit Plus Equity Fund11.70%
ICICI Pru Ace Opportunities Fund11.30%
UTI Unit Linked Insurance Plan11.00%
Birla Sun Life Dream Plan Enhancer10.00%

ELSS – The safest bet as Tax Saving Mutual Funds

ELSS or Equity Linked Savings Scheme is a tax saving mutual fund where the corpus is predominantly invested in equity and equity-related products. One of the beauties of ELSS is that individuals can avail tax benefits by investing in the same. The maximum amount that can be claimed as the deduction under Section 80C of Income Tax Act, 1961, through this scheme is ₹1,50,000. The following are the best ELSS Funds in India:

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Best ELSS Funds in India

ELSS Funds Returns for 3-years (in %)
Birla Sun Life Tax Relief 96 19.20%
DSP BlackRock Tax Saver Fund
17.30%
Reliance Tax Saver 14.20%
HDFC Tax Saver Growth 11.30%
ICICI Prudential Long Term Equity Fund 10.10%

After comparing the returns from the above two tables, it is clearly witnessed that both the funds have performed well since past three years. However, it is not good to mix the two-insurance & ELSS simply to save the tax. If tax-efficient and low-cost investment is your main focus, go for ELSS and if you are seeking for protection coverage on your investment for a longer term, it’s better you go for ULIP then.

Though ELSS and ULIP schemes get similar treatment in the tax deduction, nevertheless, they differ on many other grounds. Some of the factors are explained as follows.

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ParametersULIPsELSS
Nature of ProductInvestment and InsuranceInvestment
Tax BenefitsDeduction under sec 80 ( c), upto Rs 1.5 lakhsDeduction under sec 80 ( c), upto Rs 1.5 lakhs
Lock-in Period5 years3 Years
Investment PoolIn Debt and Equity market bothIn Equity market
ChargesIt includes mortality charge, fund management fee, administration expenses etc.
Large portion of premium goes to insurance and smaller portion goes to investment in initial years.
Expense ratio or Fund management fee up to 3%
Regulating authorityIRDASEBI

After looking at the above-explained points it’s evident that ELSS and ULIP both differ on various grounds. However, individuals who are planning to invest in any of the schemes should understand their objective and check which scheme can give them the maximum returns.

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Our take on choosing ULIPs or ELSS

One should not mix investment and insurance. The basic purpose of insurance is to financially protect your dear ones in case of any unfortunate incident. Mixing investment and insurance will leave you underinsured and you will not get any good returns. If you have any financial emergency, surrendering the policy before its maturity will fetch you a lower value. Better buy a term insurance policy and invest the balance in other options like investment in mutual funds, stocks, etc.

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Personal Loan Interest Rates November 2018
Bajaj Finserv10.99% - 16.00%
Fullerton India14.00% - 33.00%
HDFC Bank11.25% - 21.50%
ICICI Bank10.99% - 18.40%
IndusInd Bank10.99% - 16.00%
Kotak Bank10.99% - 20.99%
RBL13.00% - 18.00%
Standard Chartered Bank12.00% - 17.00%
Tata Capital10.99% - 18.00%
Home Loan Interest Rates November 2018
State Bank of India/SBI8.70% - 9.25%
HDFC8.80% - 9.60%
Bank of Baroda8.65% - 9.65%
LIC Housing8.70% - 9.05%
PNB Housing Finance9.00% - 13.00%
ICICI Bank8.95% - 9.20%
Axis Bank8.80% - 9.05%
Citibank8.90% - 9.65%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank8.75%
DHFL9.05% - 9.95%
Reliance Home Finance8.75% - 14.00%