Topic: I want an investment which can give tax benefit

So which is better whether to invest in ulip or mutual funds?

U/s 80C, an individual will be entitled to deduction up to Rs 1 lac in respect of payment/deposit out of taxable income towards certain specified instruments such as ELSS mutual funds, ULIPs, NSCs, PPF etc.

Equity Linked Saving Schemes (ELSS) are diversified equity schemes that invest in equities and equity related instruments and have a lock in period of 3 years

ELSS category has returned approx 16% year on year returns since inception and has lower lock in period. Check the iTrust Mutual Fund Comparator for comparison between different ELSS Schemes.

SBI Magnum Tax Gain Scheme, Sundaram BNP Paribas Tax Saver, Franklin India Tax Shield are few examples of good ELSS schemes

Comparison between ULIP and Mutual Funds:

1.Cost Involved: The premium paid for ULIP plans comprises of 2 elements (Investment + Risk Cover). With the increase in the client’s age, the part of premium going towards risk cover starts increasing thereby reducing the portion of investments. This premium would include the cost of administration, distribution and the margins of insurer. A customized solution should be there for serving both the needs of investment and life cover.

2.Returns that matter: Since the ULIP plans charge most of their expenses in the beginning 3-5 years; therefore, ULIPs tend to invest lesser part of premiums received, thus affecting the level of returns. Add to it, ULIPs tend to invest more in Bluechips/large Cap Stocks restricting the investments to gain from other options available.

3.Liquidity: There is a minimum 3-year lock-in period in ULIPs. But if a client wishes to redeem his holdings after 3 years, he will have to shed more money in terms of insurance charges in ULIPs as compared to mutual funds. Contrary to this, there is no such lock-in period in open-ended mutual funds (except ELSS) making them more liquid.

4.Flexibility and Diversification: The mutual fund portfolio can be well diversified based on the needs and risk profile of the client. If one mutual fund is not giving the desired returns, it can be redeemed and another one can be bought. This flexibility is not there in case of ULIPs.

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