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Difference Between ELSS and Equity Mutual Fund

For amateur investors, Equity linked savings scheme (ELSS) and Equity Mutual funds can be confusing at times. If you’re planning to invest in either of the two, you must know the difference between the two mutual funds. Read further to know more.

Overview of ELSS and Equity Mutual Fund

As an investor, one of your primary goals would be to establish a diversified investment portfolio. It not only helps you mitigate the market risk but also help you get stable returns. And, one of the best ways to have a diversified portfolio is to invest in a mutual fund scheme, which also provides capital gains for the investors.

Within a mutual fund scheme, there are different types of funds like equity funds, debt fund, hybrid funds, etc. You can choose to invest in any fund to suit your personal goals and risk appetite. One of the most popular types of mutual funds among the investors is the Equity Linked mutual funds. It is an ideal choice of investment for those investors who do want to invest directly in the stock market but wants to earn better returns.

Within equity-linked mutual funds, there are different types of funds that are categorised based on the risk levels, such as ELSS (Equity-Linked Savings Scheme), Sectoral Funds, Diversified equity funds, and Thematic funds.

Amongst other types of equity-linked mutual funds, two of the most popular funds is the Equity mutual fund and ELSS. Let’s know more about these funds.

What is Equity Mutual fund?

Equity mutual funds are mostly a type of mutual fund that invests a significant portion of the corpus in the stock market. The primary objective of these funds is to provide capital appreciation to the investors. Since the fund house majorly invests the fund in the stock market, the returns are market-linked, and it depends on the market performance. These funds have no lock-in period, and they have a fixed exit load.

What is ELSS?

ELSS mutual funds are a special type of mutual fund that offers tax exemption under Section 80C of the Indian Income Tax Act. ELSS mutual funds, which are also known as a tax-saving mutual fund, invest a significant portion of the corpus in equity or equity-related products. A distinct factor about ELSS is that is has a maturity tenure of three years among all other tax-saving instruments. Additionally, it is known to provide better returns as compared to traditional investment schemes.

Now that you know what ELSS and Equity Mutual Funds are, let us understand the differences between the two based on different factors:

  • Returns earned

    Every investor looks to invest in a scheme that offers them the best returns. While ELSS fund, historically is known to provide an average return of 10% to 15%, in three years, the returns may vary based on the market condition. The Equity mutual funds, on the other hand, are known to provide slightly higher returns than ELSS funds. But, remember with equity funds, there is also high risk.

  • Lock-in period

    ELSS funds have a lock-in period of three years. Whereas, the equity mutual funds, have no lock-in period. So, if you think ELSS has a disadvantage, you must know that it has a shortest tenure. But, if you are looking for an investment option that gives you easy liquidity option, you can consider investing in equity mutual funds; you can pay the exit load, and redeem your investment at any time you want.

  • Tax implication

    As per the Section 80C, investors can avail tax-exemption up to limit of Rs. 1.5 lacs on ELSS investment returns. This tax deduction is not available in the Equity Mutual Fund.

  • Risk factor

    Equity-linked investment schemes have a direct connection to the stock market. So, the return you earn depends on the market performance over a period. There is an element of risk with short-term investments. With a shortest maturity tenure of 3 years, ELSS reduces the risk against any short-term market volatility. It is an ideal choice of investment for people with low-risk appetite yet want to earn high returns.

Where should you invest?

The decision to invest in ELSS or Equity Mutual Fund entirely depends on your personal needs. You must determine your risk profile, financial goals, and the investment duration and choose the right investment accordingly.