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If you are looking for profitable investment options, you can choose from various equity-oriented schemes.  For instance, equity mutual funds let you invest in companies listed on the stock market with the flexibility to sell your units anytime you want. Conversely, ELSS is essentially a mutual fund that also offers tax advantages.

So, if you are willing to make an equity investment, it would be wise to weigh your option. In this article, you will learn about the key features and differences between ELSS and mutual funds. So, read on.

Equity mutual funds are equity-oriented funds that invest in share market listed companies nationally and internationally.  These investments are particularly helpful for high capital appreciation and investment growth over a long period. However, just like any other stock market investment, these are subjected to market fluctuations and risks. Most fluctuations can be seen over short terms. But if you invest in these funds for a longer period i.e. 5 to 7 years, the returns can be highly rewarding.

Moreover, the remaining funds are invested in other financial instruments to diversify. Therefore, you can take advantage of a lower-risk investment plan while getting exposure to the equity share market.

Equity-linked Savings Scheme or ELSS is also similar to equity mutual funds that invest a significant amount in equity shares of large stock market companies. However, unlike equity mutual funds, ELSS offers you tax benefits under Section 80D of the Income Tax Act of 1961.

ELSS also offers long-term capital appreciation and wealth growth and it comes with a minimum lock-in period of 3 years from the day you purchase a unit. The lock-in period is an important factor for taxation, but you can continue to hold your investments after this period.

An added advantage of the lock-in period is that it gives the fund manager time to reallocate your funds into another financial instrument or equity shares if the market conditions change within that period. Naturally, you have an added opportunity to maximise your profits.

Before deciding which one is better between ELSS or Equity mutual funds, you must have a clear financial and investment goal. Both investment tools offer benefits based on specific needs, depending on liquidity, risks, or wealth building.

• First, if you are looking for an investment option that offers you high liquidity, an equity mutual fund may be an appropriate option for you.
• In addition to offering high returns, equity mutual funds provide you with the flexibility to withdraw at any time, whether market conditions are favourable or not.
• ELSS does come with a short lock-in period of 3 years but also offers you tax benefits of up to ₹1.5 Lakhs.
• Moreover, since your money cannot be withdrawn before a specific period, the fund managers will have the flexibility to re-allocate them accordingly for maximum profits.
• Consequently, ELSS lets you receive a higher return for the same investment period than that of equity mutual funds.

Finally, the key factors for ELSS vs. equity mutual funds include tax savings and a lock-in period. If you have a higher risk appetite and can afford to keep your investments on hold for 3 years then you can opt for ELSS.

Nonetheless, both options are subject to market risks. Therefore, before you decide, consider aspects such as investment objective, reputation, relative size, previous performance, and fund allocation, etc. of the company.