ELSS VS Equity Mutual Funds: Everything You Need to Know Difference Between ELSS and Mutual Funds

What Is an Equity Mutual Fund?

What Is an ELSS?

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

Lock-in period

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.

Tax benefits

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

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?

FAQs about ELSS vs Equity Mutual Funds

Will ELSS be taxable after 3 years? up-arrow

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.

Why does ELSS give more returns? up-arrow

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.

How much should I invest in an ELSS? up-arrow

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.