ELSS vs. Mutual Funds: Which Investment Option is better?

Investing in the financial markets is an essential step towards achieving your financial goals, whether it’s buying a house, planning for your child’s education, or saving for retirement. Two popular investment options in India are Equity-Linked Savings Schemes (ELSS) and regular mutual funds. In this article, we will explore the key differences between ELSS and mutual funds and help you decide the best ELSS mutual fund.

Understanding ELSS and Mutual Funds

1.Equity-Linked Savings Schemes (ELSS)

ELSS is a specific category of mutual funds that offers investors a unique combination of tax benefits and the potential for wealth creation. ELSS funds primarily invest in equity and equity-related instruments, making them suitable for individuals with a higher risk appetite and a long-term investment horizon.

The key features of ELSS funds include:

Tax Benefits: ELSS investments are eligible for a deduction under Section 80C of the Income Tax Act, up to a maximum limit of Rs. 1.5 lakh in a financial year.

Lock-In Period: ELSS funds have a mandatory lock-in period of three years, which is the shortest among all tax-saving investment options under Section 80C.

Potential for High Returns: Since ELSS funds invest primarily in equities, they have the potential to offer higher returns compared to other tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC).

Risk: ELSS funds carry market risk, as their performance is linked to the stock market’s movements. However, a longer investment horizon can help mitigate this risk.

2. Regular Mutual Funds 

Regular mutual funds encompass a wide range of investment options, including equity funds, debt funds, hybrid funds, and more. Unlike ELSS, regular mutual funds do not offer specific tax benefits but provide the opportunity to invest in various asset classes based on your risk tolerance and financial goals.

The key features of regular mutual funds include:

No Lock-In Period: Most regular mutual funds do not have a mandatory lock-in period. Investors have the flexibility to redeem their investments at any time, depending on their financial needs.

Diversification: Regular mutual funds offer diversification across various asset classes and market segments, allowing investors to create a well-balanced portfolio.

Flexibility: Investors can choose from a wide range of mutual fund schemes based on their risk profile and investment horizon, including equity funds, debt funds, hybrid funds, and thematic funds.

No Tax Deduction: Unlike ELSS, regular mutual funds do not offer any specific tax deductions under Section 80C.

Comparing ELSS and Mutual Funds

Now, let’s delve deeper into the comparison between ELSS and regular mutual funds:

  1. Tax Benefits

ELSS takes the lead in terms of tax benefits. Investing in ELSS allows you to claim a deduction of up to Rs. 1.5 lakh from your taxable income under Section 80C of the Income Tax Act. This tax-saving feature can significantly reduce your tax liability. In contrast, regular mutual funds do not provide any specific tax deductions.

  1. Lock-In Period

ELSS funds come with a mandatory lock-in period of three years, which is relatively short compared to other tax-saving instruments like PPF (15 years) or NSC (5 years). This lock-in period encourages long-term investing and wealth creation. Regular mutual funds, on the other hand, have no lock-in period, providing greater liquidity and flexibility for investors.

  1. Risk and Returns

ELSS funds typically invest a significant portion of their assets in equities, which can lead to higher returns over the long term. However, this also means that they carry a higher level of market risk. Regular mutual funds offer a range of options with varying risk profiles, allowing investors to choose funds that align with their risk tolerance and financial goals.

  1. Investment Horizon

Both ELSS and regular mutual funds are suitable for investors with a long-term investment horizon. However, the mandatory three-year lock-in period for ELSS encourages a longer commitment to the investment, whereas regular mutual funds offer the flexibility to redeem units at any time.

  1. Diversification

Regular mutual funds provide diversification across various asset classes, including equities, debt, and hybrids. This diversification can help reduce overall portfolio risk. ELSS funds primarily focus on equities, offering potential for higher returns but with a higher level of volatility.

  1. Investment Selection

When choosing between ELSS and regular mutual funds, it’s essential to consider your financial goals, risk tolerance, and the need for tax-saving investments. ELSS funds are ideal for investors looking to save on taxes while participating in equity markets. Regular mutual funds are suitable for those who want flexibility, diversification, and a choice of investment strategies.

Best ELSS and Mutual Fund Options

When considering ELSS, it’s crucial to evaluate the fund’s track record, the fund manager’s experience, and the fund’s expense ratio. Axis Mutual Fund offers several ELSS options, such as the Axis Long Term Equity Fund and the Axis Tax Saver Fund, which have performed well historically and are managed by experienced professionals.

For regular mutual funds, investors have a wide array of choices based on their financial goals. Axis Mutual Fund also provides a range of regular mutual funds, including Axis Bluechip Fund, Axis Midcap Fund, and Axis Focused 25 Fund, catering to various risk profiles and investment horizons. Investors can take a decision after evaluating the various features and investment portfolio options to select the best ELSS mutual fund for themselves.

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