When it comes to diversifying a portfolio, mutual funds beat other investment options, thanks to their superior safety aspects and better return on investment (RoI) they offer. For salaried class investors as well as individuals new to the investing world, who have very little time or expertise to monitor their portfolio regularly, mutual funds also offer the services of a full-time fund manager. This has resulted in mutual fund investments steadily increasing over the past few years.
Today, there are various types of mutual funds offered to individuals like debt funds, equity funds, and hybrid funds. What’s more, there are even mutual fund schemes made to suit the varying needs of all investors.
One such widely popular investment avenue is an Equity-Linked Savings Scheme or ELSS. ELSS is a type of equity mutual fund, wherein the majority of the corpus is invested in equity and equity-linked instruments. This not only results in wealth creation over the long-term due to exposure to equity, but also allows individual to save on their tax liabilities. Hence, these funds are also called tax-saving mutual funds.
How is ELSS different?
What sets ELSS apart from regular equity mutual funds is that these funds provide the opportunity for tax exemption along with capital appreciation. Investments up to Rs1.5 lakh in ELSS funds qualify for tax exemption under Section 80C of the Income Tax Act, 1961. This allows individuals to save up to Rs46,800 in taxes (provided that he/she belongs to the highest tax bracket).
As such, these tax-saving mutual funds are undoubtedly one of the best bets for you if you are keen on earning substantial tax rebates and growing your wealth by staying invested for a prolonged period.
ELSS vs. Equity Mutual Funds
If you are looking to invest in mutual funds that offer substantial returns, you should be well-versed with the difference between ELSS and equity mutual funds. Let’s understand these differences:
- Lock-in period
ELSS funds come with a lock-in period of 3 years, whereas there’s no such lock-in period in the case of regular equity mutual funds. However, investors should be wary of exit load, if any, in case he/she wishes to redeem the investment in the equity mutual fund.
Equity mutual funds are believed to provide marginally higher returns than investments in ELSS.
- Risk factor
The performance of an equity-linked scheme is linked to the performance of the stock market. Moreover, there is always an element of risk prevailing with equity in case of short-term investments. Contrary to that, the 3-year lock-in period of ELSS funds acts as a safeguard against any kind of short-term market volatility.
An investor investing in ELSS funds can enjoy tax exemption of up to Rs1.5 lakh and save up to Rs46,800 in a financial year. This option is unavailable to regular equity mutual funds.
An investor can choose the right investment avenue for themselves after considering the above factors and aligning their financial goals accordingly. Remember that the sooner you start with your investments, the higher your returns will likely be at maturity. Happy Investing!