Among various mutual fund categories, Equity-Linked Savings Schemes (ELSS) stand out as a unique offering that invest primarily in equity-linked instruments. ELSS mutual funds help investors earn higher returns over the long term. Additionally, ELSS is known as a “tax-saver mutual fund” due to its unique tax-saving benefits under Section 80C of the Income Tax Act, 1961, making it an attractive investment option for tax-conscious investors. This article will explain the three key differences between ELSS funds and equity mutual funds.
What is the definition of an ELSS mutual fund?
An ELSS mutual fund is a diversified equity mutual fund that invests at least 80% of its assets in equity and equity-related instruments. These funds aim to generate capital appreciation over the long term by investing in well-established companies with high growth potential. ELSS mutual funds come with a lock-in period, which means investors cannot redeem their investment before the completion of the lock-in period. This lock-in period is three years, which is relatively shorter compared to other tax-saving instruments like Public Provident Fund (PPF). Investments in ELSS funds up to ₹1.5 lakh are eligible for a deduction from the investor’s taxable income in the financial year of investment. Therefore, ELSS funds can help investors reduce their tax liability and help investors in planning their taxes.
Know the differences between equity and ELSS mutual funds:
While ELSS mutual funds are a sub-category of equity funds, there are some key differences between ELSS funds and other equity funds
- Lock-in period: Equity mutual funds do not have any lock-in period and allow investors to buy and sell units at any time. On the other hand, ELSS mutual funds have a mandatory lock-in period of three years from the date of investment. This lock-in period ensures that investors stay invested for a reasonable duration, encouraging long-term wealth creation.
- Tax deduction: Tax-saving is a significant factor that differentiates ELSS from regular equity mutual funds. As mentioned earlier, investments in ELSS funds qualify for a deduction under Section 80C, whereas regular equity mutual funds do not offer any such tax benefits. The tax deduction available in ELSS makes it an appealing option for individuals looking to save on taxes while investing in equity markets.
- Liquidity: Liquidity refers to the ease with which investors can convert their investment into cash. Equity mutual funds generally offer high liquidity, allowing investors to redeem their units at any time. However, ELSS funds come with a lock-in period, restricting liquidity during the first three years of investment. Once the lock-in period is over, ELSS funds offer the same level of liquidity as regular equity mutual funds.
ELSS or ‘tax-saving’ mutual funds offer tax-saving advantages and encourage long-term investment through their three-year lock-in period. Equity mutual funds, on the other hand, provide higher liquidity and have no lock-in period. Investors should carefully consider their financial goals, risk appetite, and investment horizon before choosing between equity mutual funds and ELSS mutual funds. Both options have their merits, and a well-diversified investment portfolio may include a mix of both to achieve long-term wealth appreciation and tax-saving benefits.