Yes, after three years when the lock-in period is over, you can liquidate your investment earnings. The gains you make then will be considered as Long Term Capital Gains (LTCG). Consequently, as per the taxation rules for equity funds, ELSS will also be taxed at 10% without indexation for capital gains over ₹1 Lakh.
ELSS VS Equity Mutual Funds: Everything You Need to Know Difference Between ELSS and Mutual Funds
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.
What Is an Equity Mutual Fund?
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.
What Is an ELSS?
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.
What is the Difference Between ELSS and Mutual Funds?
Looking from the outside, both equity mutual funds and ELSS seem very similar as both majorly invest in equity share markets (at least 65% of their corpus). However, if you dig deeper into their functioning, you will find some major differences.
The majordifferences between ELSS and mutual funds are as follows:
Points of Difference
Equity-linked Savings Scheme (ELSS)
Equity Mutual Funds
ELSS has a lock-in period of a minimum of 3 years starting from the day you purchase the investment units.
Equity mutual funds do not have any lock-in period.
You can avail a tax deduction of up to ₹1.5 Lakhs, as per Section 80C of the Income Tax Act of 1961.
There is no tax benefit available.
Liquidity is low since your investments are locked in for at least 3 years.
Liquidity is high due to no lock-in period. You can withdraw your money any time you want.
Which Is Better ELSS or Equity Mutual Funds?
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.
FAQs about ELSS vs Equity Mutual Funds
The returns on ELSS are likely to be higher than other large-cap funds due to its low turnover ratio. Since it has a short-term lock-in period of 3 years, lower number of portfolio holdings are replaced each year. This allows the fund manager to invest in profitable stocks or re-allocate them depending on the market situation. Naturally, the diversity of the investment fetches you a higher long-term return.
With ELSS, there is no restriction on the maximum investment amount. The tax advantages, however, are fixed at Rs 1,50,000 per year. So, by investing Rs. 1.5 lakh a year, you may first think about utilising your Section 80C limit to the fullest extent possible. Once the limit has been reached, you can invest more if you are ready to keep your money locked in for three years. If not, you could think about investing in open-ended mutual funds.
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- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
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