Mutual Fund vs ELSS: A Comprehensive Guide

6 mins read
Know the relationship between mutual funds and ELSS to make better financial decisions for the long-term.

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. 

What is a Mutual Fund?

A mutual fund serves as a collective investment avenue where numerous investors contribute their money, creating a sizable fund. This pooled money then gets strategically distributed across diverse investment options, such as stocks, bonds, and other market instruments. The entire pot of investments is managed by a professional known as the fund manager.

With insights from a research team, this fund manager makes pivotal buy-and-sell choices, always aligning with the mutual fund’s overarching goals. Every day, after the market closes, a snapshot of the fund’s health is captured through its Net Asset Value (NAV – a simple metric derived by dividing the entire fund’s worth by its outstanding share count.

Read More About: What is Mutual Fund?

Benefits of investing in Mutual funds:

  • 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.
  • 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.
  • Ready Access to Funds: The liquidity of most mutual funds stands out. An investor can, on any working day, choose to cash out. And in just a span of a few days, they can get their hands on the funds pegged to that day’s NAV.
  • 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.
  • 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 like mutual funds 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, there’s a small catch with ELSS. Upon investing, your funds remain locked for a duration of 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

  • Tax Savings: ELSS offers notable tax advantages. Investments up to ₹1.5 lakh in ELSS can be deducted from your taxable income, courtesy of 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. 
  • 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. 
  • 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. 
  • Dual Benefits: With ELSS, you get to potentially amplify your investments (thanks to its equity components) while also reducing your tax liabilities. 
  • 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:

  1. Regulation: Both ELSS and mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
  2. Management: Both are managed by expert fund managers who decide on the composition and strategy.
  3. Investment in Equities: Both can invest in the stock market, though the extent may differ.
  4. 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:

  1. 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.
  2. 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.
  3. Tax Benefits: Only ELSS offers tax deductions under Section 80C.
  4. 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:

  • 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.
  • 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.
  • Shorter Lock-in Period: 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.

In conclusion, whether it’s ELSS or mutual funds, both have their unique advantages. It’s imperative to align your choice with your financial goals and seek expert advice if needed. Happy investing!


Can I withdraw my investment from ELSS whenever I want?

No, ELSS comes with a mandatory lock-in period of 3 years from the date of investment. This means that you cannot redeem your ELSS investments before completing these 3 years.

Are returns from mutual funds and ELSS guaranteed?

No, neither mutual funds nor ELSS guarantee returns. Both are linked to market performance, and the returns depend on the underlying assets’ performance and the fund manager’s decisions.

Apart from tax benefits, why should I consider investing in ELSS over other mutual funds?

ELSS not only offers tax advantages but also potentially higher returns given its equity-focused nature. Moreover, among tax-saving instruments under Section 80C, ELSS has a relatively shorter lock-in period, making it an attractive option for many investors.