Equity Linked Savings Schemes (ELSS) and equity mutual funds are both investment vehicles that primarily invest in equities, providing investors with exposure to the stock market. However, there are key differences between a ELSS mutual fund and a generic equity fund. Let’s explore these differences-
ELSS Mutual Funds
Tax Benefits-
Primary Purpose:ELSS funds are specifically designed for tax-saving purposes. They offer tax benefits under Section 80C of the Income Tax Act 1961, allowing investors to claim deductions on investments up to Rs. 1.5 lakh in a financial year.
Lock-in Period:ELSS has a mandatory lock-in period of three years. Investors cannot redeem or withdraw their investments during this time period.
Investment Horizon-
Long-Term Focus: While the lock-in period is three years, ELSS funds are generally recommended for a longer investment horizon to capitalize on the potential of equity markets and achieve wealth creation.
Risk Profile-
High Risk: ELSS mutual funds invest primarily in equities, making them subject to market volatility. Investors should have a high-risk tolerance when considering ELSS mutual fund investments.
Tax Implications-
Tax on Returns: While ELSS funds offer tax benefits on investment, returns generated by the fund are subject to long term capital gains taxes.
Equity Mutual Fund
Tax Implications-
Tax on Returns:Returns from equity funds are subject to capital gains tax, depending on the holding period. However, equity funds, in general, do not provide specific tax benefits under Section 80C.
Lock-in Period-
No Mandatory Lock-in: Unlike ELSS funds, equity mutual fundschemesdo not have a mandatory lock-in period. Investors can redeem their units at any time, providing greater liquidity.
Investment Horizon-
Varies by Fund Type:Equity mutual fund comes in various categories such as large-cap, mid-cap, small-cap, multi-cap and thematic funds, etc. The recommended investment horizon may vary based on the fund’s investment objective and strategy.
Risk Profile-
Varied Risk Profiles: The risk associated with equity mutual funds depends on the fund’s investment strategy. Large-cap funds are generally considered less risky compared to mid-cap or small-cap funds.
Commonalities
Professional Management:Both ELSS and equity mutual funds are managed by professional fund managers who make investment decisions based on market research and analysis.
Diversification:Both types of mutual funds typically offer diversification across a basket of stocks, reducing the risk associated with individual securities.
Market Exposure:Both ELSS funds and equity mutual funds provide exposure to the equity market, allowing investors to participate in the potential growth of the stock market.
Choosing Between ELSS and Equity Mutual Funds:
Investment Goals: If tax-saving is a primary goal and there is a willingness to lock in funds for a minimum of three years, ELSS funds might be suitable. For investors focused on long-term wealth creation without the constraints of a lock-in period, equity mutual funds could be considered.
Risk Tolerance: Investors should assess their risk tolerance and investment horizon. ELSS mutual fund might be more suitable for those comfortable with a moderate to high level of risk and a longer-term perspective.
Liquidity Needs: If liquidity is a priority, equity mutual funds with no mandatory lock-in may be more suitable for investors who may need to redeem their investments at short notice.
Conclusion
In conclusion, the choice between ELSS and equity mutual funds depends on individual financial goals, risk tolerance, and the need for tax benefits. It’s often advisable to consult with a financial advisor or a mutual fund distributor to align mutual fund investment choices with specific financial objectives and circumstances.
