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In the vast world of investments, ELSS vs mutual fund is a frequent query that often pops up among investors. Whether you're a novice or a seasoned investor, understanding the core difference between mutual funds and ELSS is crucial to making informed decisions. In this comprehensive guide, we'll delve deep into both these investment avenues, discussing their benefits, similarities, and differences.
Key Takeaways
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Mutual funds pool investors’ money to invest in diversified assets like stocks and bonds, offering liquidity, flexibility, and professional management.
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ELSS funds are a type of mutual fund that focus on equities and provide tax benefits under Section 80C, allowing deductions up to ₹1.5 lakh annually.
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ELSS features a shorter 3-year lock-in period, offering quicker access compared to other tax-saving options like PPF or NSC.
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Both ELSS and mutual funds are SEBI-regulated, professionally managed, and valued using Net Asset Value (NAV).
Understanding of Mutual Fund
A mutual fund is an investment instrument which combines the funds from several investors to purchase a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional fund managers and work towards the generation of returns according to set goals - growth, income, or stability. The investors are given the units that reflect their portion of the fund holdings, and the performance is determined using the Net Asset Value (NAV).
Understanding mutual funds helps you enjoy the benefits it offers - diversification, professional management and accessibility. This makes mutual funds suitable for various types of investors and one of the most efficient means for investing in the financial markets.
Read More About: What is a Mutual Fund?
Benefits of Investing in Mutual Funds:
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Diversified Investments
One of the standout perks of mutual funds is their ability to diversify. Instead of staking all on a lone stock or bond, these funds scatter the risk. This design ensures that the slump of one asset might be balanced out by another's surge.
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Expert Oversight
Not every individual can juggle the intricacies of daily investment management. Mutual funds offer a solution: a skilled fund manager at the helm. Supported by an adept research brigade, they navigate the decisions – what to keep, what to let go.
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Ready Access to Funds
The liquidity of most mutual funds stands out. An investor can, on any working day, choose to cash out from open-ended funds. And in just a span of a few days, they can get their hands on the funds pegged to that day's NAV.
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Economies of Scale
Pooling resources grants mutual funds a unique strength. They can command better service terms, tap into expansive research, and access a gamut of securities. This is something a solo investor might find challenging to match.
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Flexibility
With features like systematic investment plans (SIPs), systematic withdrawal plans (SWPs), and systematic transfer plans (STPs), mutual funds offer a lot of flexibility in terms of investment and withdrawal strategies.
What is ELSS?
The Equity Linked Savings Scheme (ELSS) is a type of mutual fund with a keen focus on equities and added tax benefits. These funds make significant plays in equity markets, and their standout feature is the tax relief they provide. By investing in ELSS, you're not only aiming for potential gains from the market but also benefit from tax deductions under Section 80C of the Indian Income Tax Act.
However, upon investing, your funds remain locked for 3 years. This means you can't liquidate or move these funds within this period. Compared to other tax-saving instruments such as the Public Provident Fund (PPF) or the National Savings Certificate (NSC), this lock-in period is considerably shorter.
Read More About: What are ELSS Mutual Funds
Advantages of Investing in ELSS
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Tax Savings
ELSS offers notable tax advantages. Investments up to ₹1.5 lakh in ELSS can be deducted from your taxable income under Section 80C. To put it in perspective, if you're taxed at the 30% rate and you invest ₹1.5 lakh in ELSS, you stand to save as much as ₹45,000 on your tax bill.
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Potential for Strong Returns
Given their heavy inclination towards equities, ELSS funds often present the opportunity for higher returns compared to other conventional tax-saving instruments.
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Relatively Short Lock-in
The 3-year lock-in period of ELSS is shorter than many other tax-saving avenues. This ensures your funds aren't inaccessible for extended durations.
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Dual Benefits
With ELSS, you get to potentially amplify your investments (thanks to its equity components) while also reducing your tax liabilities.
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Option for Dividends
Some ELSS funds offer a dividend payout option, providing investors with potential periodic income. However, it's pivotal to remember that dividends aren't guaranteed and are subject to the fund's performance.
Similarities Between ELSS and Mutual Funds
When evaluating ELSS vs mutual funds, it's imperative to recognise the common ground they share. Here's a snapshot of their similarities:
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Regulation: Both ELSS and mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
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Management: Both are managed by expert fund managers who decide on the composition and strategy.
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Investment in Equities: Both can invest in the stock market, though the extent may differ.
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Net Asset Value (NAV): The value of a unit of both ELSS and mutual funds is represented by Net Asset Value (NAV), which fluctuates based on market conditions.
Difference Between ELSS and Mutual Funds
Here's how ELSS vs mutual funds differ:
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Purpose: While ELSS is specifically designed for tax savings with an equity focus, mutual funds have broader objectives, ranging from wealth creation to regular income.
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Lock-in Period: ELSS comes with a mandatory lock-in period of 3 years. Most mutual funds, especially open-ended ones, don't have such a restriction.
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Tax Benefits: Only ELSS offers tax deductions under Section 80C.
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Risk: Since ELSS funds predominantly invest in equities, they might have a higher risk compared to some mutual fund categories like debt funds.
ELSS VS Mutual Fund: Which One Stands Out for Tax Savings?
For those eyeing tax benefits, ELSS clearly stands out from the mutual fund crowd. Here's the rationale:
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Tax Deduction
ELSS comes with a perk - they're eligible for tax deductions, thanks to Section 80C of the Income Tax Act. By investing in ELSS, you can claim a deduction of up to ₹1.5 lakh from your taxable income, which isn't the case with regular mutual funds.
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Potential Higher Returns
Considering that ELSS funds invest primarily in equities, they have the potential to generate higher returns compared to other tax-saving instruments in the long run, though they also come with higher volatility.
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Shorter Lock-in Perio
Among tax-saving instruments available under Section 80C, ELSS funds have one of the shortest lock-in periods of just 3 years. This means your money is accessible relatively sooner than options like PPF or NSC.
Tips for Investors
Here are some tips to help you make an informed decision whether you choosing an ELSS fund or a mutual fund: Define your financial objectives clearly and then select a mutual fund.
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Assess your risk appetite and align it to an appropriate category of funds (equity, debt, hybrid).
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Look at the fund's history, but avoid making decisions based on it alone.
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Check the fund’s expense ratio and exit load to evaluate cost efficiency.
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Diversify risk by investing across various types of funds.
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Use Systematic Investment Plans (SIPs) for disciplined, long-term wealth creation.
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Regularly check and rebalance your portfolio to stay aligned with your financial goals.
onclusion
Knowledge about mutual funds and ELSS enables investors to make the right decisions on the basis of objectives and taxation. Although mutual funds have the flexibility, liquidity, and diversification over the asset classes, ELSS has the added benefits of tax-saving under section 80C as well as the potential of appreciation of capital appreciation in the long term.
ELSS funds also have a shorter lock-in period of 3 years compared to other tax-saving instruments, and hence are more appealing than other tax savings plans such as PPF or NSC. This combination of ease, market exposure and tax efficiency enables the investors to amass wealth systematically.
Whether you want the flexibility offered by the traditional mutual funds or the dual advantages of the ELSS, invest with Angel One for transparency, professional advice and easy tracking to help you reach the established financial targets effectively.