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ELSS or ULIP or PPF Where to Invest?

Two-in-one offers that provide the best of both scenarios can be exciting, especially if it comes at the price of one. The same goes for investments too. Investors take delight in an investment option that can provide reasonable returns and lower their tax outgo.

ELSS, ULIPs, and PPF are three such popular investment options available in India in this regard. So, which one should you choose among the three? Let's find out.

Before we begin, let's shed some light on the fact that many investors look for an investment option that provides high returns clubbed with low to no risk that too in a short period of time. Remember this, no matter how attractive the investment may be, you need to accept the fact that such a plan doesn't exist. It is important to make sure that you are staying invested for the long term. If your goal is to save income tax, then you should consider PPF and ELSS, whereas if you want to create a retirement corpus, then you must look at ULIP, which too offers tax benefits. However, the most critical aspect here is to figure out the right investment option to meet your future goals. Let's dig deep to understand the characteristics of various investment options.

ELSS – Equity Linked Saving Scheme Mutual Funds

In simple terms, in case you want to invest in mutual funds and want to save income tax as well, then ELSS mutual funds should be your go-to option. ELSS is a diversified equity mutual fund investment option that invests in the capital market and chooses the companies with different market capitalisations. ELSS investors can claim benefits under Section 80C of the Income Tax Act, 1961, and get tax deductions for a maximum of Rs. 1.5 lakhs in a financial year.

Rate of return: ELSS funds come under the open-ended equity category, which means up to 65% of the money is invested in equity. The rate of return is not fixed, which means it purely depends on the market forces over a long period. It is important to note that ELSS comes with the lowest lock-in period i.e., three years. Moreover, returns on ELSS schemes are taxed at 10% under the LTCG head with no indexation benefit, if the returns exceed Rs. 1 lakh in a given financial year. On the contrary, PPF comes with a lock-in period of 15 years.

Risk factor: When it comes to equity schemes, there are certain risks involved. Investing in ELSS can be risky, and returns can be volatile in the short term. However, stocks have the potential to offer excellent returns in the long run.

ULIP – Unit Linked Insurance Plan

ULIP is one of the best investment options when the purpose of your investment is wealth creation that also covers your life. ULIP is a specially designed investment cum insurance product where a part of your investment goes towards life insurance premium while the remaining is invested in the investment fund of your choice – it can be equity, debt, or a mix of both. ULIP can help you save tax under Section 80C. Moreover, when the policy matures, the returns are exempted from income tax under Section 10(10D) of the Income Tax Act, 1961. The best part about ULIPs is that you can switch between funds as per your investment objective during the term of the plan.

Rate of return: The rate of return in ULIPs can vary because the funds are invested in the combination of equity, debt, and hybrid funds, as per the choice of an individual investor.

Risk factor: ULIPs may seem like the best investment option; however, before investing your all hard-earned money here, you must know that ULIPs come with a lock-in period of five years. And ULIPs are not as diversified as ELSS; therefore, the risk factor is high.

PPF – Public Provident Fund

Public Provident Fund was introduced in India in 1968 with the aim to mobilise small savings as investments that offer decent returns. Decades later, it still remains a favourite investment option for many investors. One of the major reasons why PPF is still a preferred investment option is because of its 'safe + tax saving' nature. If you want to invest in a safe investment option with steady and guaranteed returns and also want to save taxes, then you should opt for none other than PPF. One thing to keep in mind before investing in PPF is the lock-in period, which is 15 years. Section 80C of the Income Tax Act provides PPF with EEE (Exempt, Exempt, Exempt) tax benefit, which means that investment made up to Rs. 1.5 lakh in a year the returns you earn from PPF, and the corpus you receive when the investment is mature, are all exempted from taxation.

Rate of return: Even though PPF comes with a lock-in period of 15 years, there are provisions under which investors can partially withdraw funds after completing 7 years. The current interest rate of PPF is 7.10%. And compared to FD, the returns rate of PPF is far more attractive.

Risk factor: One of the biggest benefits of investing in PPF is that the risk associated with it is very low. This is possible because the Government of India backs it.

Here's a comparative analysis of PPF, ELSS, and ULIP.

Particulars Tax benefits Rate of return Lock-in period Minimum investment
ELSS Tax deduction under Section 80C of the Income Tax Act up to Rs. 1.5 lakhs Dynamic (may vary from 10 to 15%) 3 Years Rs. 500
ULIP Tax deduction for premium paid under Section 80C, tax exemption on maturity amount under Section 10(10D) Dynamic. (May vary from the choice of investment made) 5 Years Dynamic
PPF Under Section 80C of the Income Tax Act, Interest accrued exempted, Maturity proceeds exempted PPF gets EEE tax benefit. 7.9% 15 Years Rs. 500 (max Rs. 1.5 lakh in a year)

Now that you know about all three investment options, you should choose what suits your needs and financial goals. It is advisable to diversify your investment, but it is important to note that you should always consider your risk appetite before making an investment and take a calculative risk to maximise your returns.