ELSS and Mutual funds are similar in nature. Generally, ELSS is referred to as tax saving mutual fund as well. But, these two serve a completely different purpose to investors. I thought of highlighting ELSS vs mutual funds difference, comparison and review.
Equity Linked Savings Scheme (ELSS)
- Equity Linked Saving scheme (ELSS) is an open-ended equity mutual fund scheme.
- These are diversified equity funds suitable for investors who are comfortable to risk.
- A popular investing alternative option for investors who want the benefits of both capital appreciation and tax savings.
- The investment made in ELSS is tax exempt up to Rs. 150000 under section 80C.
Mutual Funds
- Mutual funds are professionally managed funds which pool money from numerous small investors.
- It invests in equity and debt instrument of publicly traded companies and of government securities.
- The objectives of mutual funds are wealth maximisation over long term period.
- There are various types of mutual funds like equity funds, debt funds, balanced funds etc. to suit the various financial needs of investors.
- ELSS are also a kind of mutual fund.
Comparison Between ELSS and Mutual Funds
Let’s do a quick comparison of the two important terms: ELSS vs Mutual Funds.
1. Approach to Investment:
Investment in ELSS does not restrict to tax saving purpose only. It opens the door to the equity investment in a disciplined fashion. The returns are more as compared to other tax saving instruments like PPF, NSC. One should check the fund’s return over the long term and the performance of fund manager in managing the portfolio.
Investment into mutual funds is decided by the financial goal, risk appetite, time period of investment of an investor. Mutual Fund’s sole objective is wealth maximisation over long period time.
Also, know the difference ELSS vs. PPF vs. ULIP
2. Lock-in Period:
Investment in ELSS have 3 years lock-in period where you cannot withdraw funds for at least 3 years. Moreover, if the investment is done through SIP, then each installment of SIP has to complete the mandatory 3 years lock-in period before it can be liquidated.
Mutual funds don’t have any lock-in period on investment and are highly liquid investment.
3. Risk Factors:
ELSS doesn’t guarantee any return on investment just like Mutual funds. The management and investment approach are same for both fund types.
ELSS funds are actively managed, where risk is managed efficiently by the fund manager. Historically, ELSS has outperformed the traditional tax saving instruments. In mutual funds, investors can choose category of fund according to their risk appetite but investor of ELSS does not have this option
4. Tax Benefits:
The main purpose of investing in ELSS is the attractive tax benefit. The investment made on ELSS is tax exempt under section 80C of The Income Tax Act. So, you can claim a tax deduction of upto Rs. 1.5 lakhs for the year in which investment has been made.
Mutual Funds enjoy the benefits of taxation for long term investment. Taxation of different fund types is based on period of holding.
As discussed above, the only major difference in investing in ELSS than mutual funds is the tax benefit. But, it also comes with certain disadvantages like lock-in period, lack of flexibility in a portfolio of the fund and risk on capital.
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Further, ELSS falls in the category of Equity funds. So, after the introduction of 10% tax on equity (where LTCG exceeds Rs.1 lakh during a financial year) this is a matter of concern for investors.
What do you think about it? Which investing option do you like? Do share your feedback.