Finance & Economics

The difference between ELSS funds and mutual funds

Tax saving mutual funds, also known as Equity Linked Savings Schemes, are a specific category of mutual fund scheme that offers tax benefits under Section 80C of the Income Tax Act 1961 in India. Here are the key differences between ELSS funds and mutual fund in general:The difference between ELSS funds and mutual funds

Tax Benefits

Tax saving mutual funds (ELSS): These funds offer tax benefits to investors under Section 80C of the Income Tax Act, allowing them to claim deductions on investments up to a specified limit (currently ₹150,000 per financial year in India).

Mutual funds: While other types of mutual funds do not offer specific tax benefits like ELSS funds, they may generate wealth for investors through dividends, capital gains, or long term compounding, depending on the type of fund and the investor’s tax jurisdiction. Other than ELSS funds, there are funds which help invest in various debt securities, gold and other metals, etc.

Lock-in Period

Tax saving mutual funds (ELSS):ELSS mutual funds have a mandatory lock-in period of three years. Investors cannot redeem or withdraw their investments during this period.

Mutual funds: Most mutual funds do not have a mandatory lock-in period, allowing investors to buy or sell units at any time based on the fund’s NAV or Net Asset Value.

Investment Objective

Tax saving mutual funds (ELSS):ELSS funds primarily aim to provide tax benefits to investors while also offering the potential for capital appreciation through investments in equity or equity-related securities.

Mutual funds: Mutual funds encompass a broader range of investment objectives, including capital appreciation, income generation, wealth preservation, or a combination of these financial goals. They may invest in various asset classes such as equities, bonds, money market instruments, and alternative investments for heading closer to the aforesaid goals.

Risk Profile

Tax saving mutual funds (ELSS): ELSS funds typically invest a significant portion of their assets in equities or equity-related instruments, making them subject to market risks associated with stock market fluctuations. Tax saving mutual funds are also called diversified equity funds as they invest across sectors and stocks of various market capitalization.

Mutual funds: The risk profile of mutual funds varies depending on the fund’s investment strategy, asset allocation, and underlying securities. For example, equity funds generally carry higher risks as compared to debt funds or money market funds or liquid funds.

Flexibility

Tax saving mutual funds (ELSS): Due to the mandatory lock-in period of 3 years, ELSS funds do not offer any liquidity during the initial three years of investment. Units of ELSS mutual funds can be redeemed only after the minimum holding period of 3 years.

Mutual funds: Most mutual fund investment provide flexibility in terms of liquidity, allowing investors to buy or sell units based on their financial needs or investment objectives.

Conclusion

In summary, while tax saving mutual funds are a specific category of mutual funds offering tax benefits and a mandatory lock-in period, mutual funds in general encompass a broader spectrum of investment options with varying objectives, risk profiles, and liquidity features. A novice or experienced investor must do thorough research on which one to choose based on their respective risk profile, financial goals, their advisor’s suggestions and more, in order to make the best decision when it comes to forming a robust portfolio.

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