Equity Linked Savings Schemes (ELSS) are a popular mutual fund investment option for individuals looking to combine tax savings with potential investment growth.
But how do ELSS funds compare to other types of equity mutual funds that don’t offer tax benefits? Various mutual funds aim to build wealth through stock market investments, yet they differ in key ways like lock-in period, liquidity, and tax treatment. This article examines the comparison between ELSS and other equity fund options.
What is an ELSS Fund?
An ELSS fund, or Equity-Linked Savings Scheme, is the only type of mutual fund eligible for tax deductions under Section 80C of the Income Tax Act, 1961. By investing in ELSS mutual funds, you can claim a tax deduction of up to ₹1,50,000 per year and potentially save up to ₹46,800 in taxes.
ELSS funds invest at least 80% of their portfolio in equity and equity-related instruments, with the rest optionally in debt.
They have the shortest lock-in period among Section 80C tax-saving options—just three years. After that, the investment can be fully redeemed without any restrictions.
Overview of Other Equity Mutual Funds
Equity mutual funds in India offer investors a variety of options tailored to different risk appetites and investment goals. These funds primarily invest in company stocks and are categorized based on the market capitalization of the companies they invest in:
- Large-Cap Funds: Focus on companies ranked 1st to 100th by market capitalization. These well-established firms provide stability and consistent returns, making them suitable for conservative investors.
- Mid-Cap Funds: Target companies ranked 101st to 250th. These firms offer a balance between risk and return, appealing to investors with moderate risk tolerance.
- Small-Cap Funds: Invest in companies ranked 251st and beyond. While they have high growth potential, they also come with increased volatility, suiting investors with a higher risk appetite.
On top of that, Multi-Cap Funds invest across large, mid, and small-cap companies, providing diversified exposure to various market segments.
Unlike ELSS funds, these equity funds do not offer tax deductions under Section 80C and typically have no lock-in period, allowing greater liquidity.
Comparative Analysis: ELSS vs. Other Equity Funds
When investors seek to compare mutual funds, particularly Equity Linked Savings Schemes and other equity mutual funds, several key factors emerge:
| ELSS Funds | Other Equity Mutual Funds | |
| Tax Benefits | Investments up to ₹1.5 lakh qualify for deduction under Section 80C of the Income Tax Act. | No tax deductions available for investments. |
| Lock-in Period | Mandatory lock-in of 3 years; funds cannot be redeemed before this period. | Generally, no lock-in period; investors can redeem units at any time. |
| Liquidity | Less liquid due to the 3-year lock-in requirement. | Highly liquid; investors can redeem units as needed, subject to exit loads if applicable. |
| Investment Focus | Primarily invests in equities across various sectors and market capitalizations. | Can focus on specific asset classes like equity and debt, or follow diversified strategies. |
| Risk Profile | High risk due to equity exposure; suitable for investors with a higher risk appetite. | Risk varies depending on the fund’s investment strategy and portfolio composition. |
| Return Potential | Potential for high returns over the long term, subject to market performance. | Returns depend on the fund’s focus; equity funds generally aim for capital appreciation. |
| Suitability | Ideal for investors looking to save on taxes and willing to commit funds for at least 3 years. | Suitable for investors seeking flexibility without tax-saving motives. |
Conclusion
ELSS funds offer tax benefits under Section 80C and have a 3-year lock-in period, making them suitable for long-term investors seeking tax savings. In contrast, other equity mutual funds provide greater liquidity without tax deductions. Both aim for capital growth through equity investments, but choosing between them depends on your tax planning needs and investment horizon.
