Is it better to invest in ELSS or Mutual Fund?

In simple words, it can be said that you cannot compare an ELSS with a mutual fund. Both are equity mutual funds so what is the distinction between ELSS and Equity Mutual Fund. An ELSS is also a mutual fund that offers tax deductions of up to Rs 1,50,000 a year under Section 80C of the Income Tax Act, 1961. The only difference between an ELSS and other mutual funds is that the latter does not offer tax benefits.

Mutual funds are one of the most efficient investment options to minimise tax liability and attain financial freedom. Investors often ignore the tax consequences while making investment decisions. For instance, an investor may get 5-6% interest from a fixed deposit scheme. However, the interest income is fully taxable, thus the effective post-tax return for an investor in the highest tax bracket will be tantamount to 3.5-4.2%, not even beating inflation in recent times.

Equity Linked Savings Scheme:

Investors save taxes by investing in Equity Linked Savings Scheme ELSS Mutual Funds. ELSS are known to be great tax-saving instruments under section 80C of the Income Tax Act, 1961.  ELSS mutual funds qualify for deduction from investors’ taxable income under Section 80C of the Income Tax Act 1961. The maximum investment amount eligible for tax deduction under Section 80C stands at Rs 1.5 lakhs. Investors in the highest tax bracket can therefore save up to Rs 46,350 in taxes (Rs 1.5 lakhs X 30.9% tax + cess) by investing in ELSS mutual funds.

ELSS mutual funds have a lock-in period of three years which means that investors must leave the money in notified funds for a minimum period of three years. There is no capping on maximum duration. ELSS is a very good option for investors who are willing to take moderate to high risks.

Mutual Funds:

A mutual fund is an efficient investment option to minimize tax liability and attain financial freedom. Mutual Fund is a trust that pools together the resources of investors to make a foray into investments in the capital markets. The fund is managed by a professional fund manager who invests the collected money in various stocks, bonds, or other securities according to the fund’s specific investment objectives. They are extremely liquid while it is ideal that you hold onto them for 3 years or more. You can withdraw it after one year where there would be no penalty, or an exit load applied.

The major difference between ELSS mutual funds and any other equity mutual fund is the tax benefit and the lock-in period. ELSS allures many investors as it provides tax benefits under section 80C. Without any confusion, it can be said that tax planning and saving is a better way of managing your finances. But tax-saving should not be the only reason for investing in an equity-oriented mutual fund like ELSS. The investment option must satisfy your investment objectives and other preferences.

ELSS mutual fund is a better option for an investor who wishes to invest mutual fund for a long term of a minimum of 3 years and save taxes. Since there is a lock-in period with ELSS, it is a suitable option for an investor who does not have an immediate upcoming fund requirement or he/ she has sufficient liquid funds to meet the short term needs. On the other hand, equity mutual funds are a better option for investors whose objective is not tax saving under section 80C and understands that they might have a fund requirement within the upcoming 3 years. Furthermore, investors who wish to invest in other types of equity mutual funds like mid-cap funds, sectoral funds, contra funds, value funds and so on must not opt for ELSS. The selection between ELSS and other mutual funds depends on the investment objective, investment duration, and understanding of risk with exposure to equities.

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