Finance

Investing in ELSS Funds vs. Equity Funds – Which is Better?

Taxpayers are constantly looking for investment options that will allow them to save on tax and will also serve the purpose of wealth maximization. Considering the number of investment options available to taxpayers, it is advisable to diversify the investment in order to increase the rate of return and reduce the risk associated with the same.

An equity fund is a mutual fund, which is invests mainly in the stock market, whereas an Equity-Linked Saving Scheme (ELSS) is a type of a mutual fund, which divides the funds of investors into equity and debt. The second type of funds is also known as tax-saving mutual funds.

ELSS or equity mutual fund

Investment in any form is good, but when it comes to growing your wealth, allocating your money after careful consideration is a must. Below is a comparison between ELSS and equity mutual funds that will help you make an informed decision.

  • Lock-in period and exit load

Equity funds do not have any lock-in period; hence they can be withdrawn at any point of time. ELSS funds have a lock-in period of three years. The lock-in condition is applicable to each investment made in ELSS.

  • Return ratio

ELSS has a higher return ratio in comparison to equity mutual funds since it allows fund managers to choose the stocks based on the risk appetite of the investor. The fund managers ensure that the overall transaction value of the mutual fund remains low. With each investment, they will buy stocks on the basis of market volatility; hence the overall purchase value of the portfolio will come down. The holding period in the case of ELSS should be higher than that of equity funds. This will help maximize returns in the long run. The overall comparison of past results shows that ELSS has had the highest return in a three-year period as compared to equity funds. The return ratio in equity funds varies from one fund to another. The movement of the market will also have an impact on the return ratio.

  • Taxation

The returns from ELSS are tax-free. On the other hand, as per the current scenario, the tax on capital gains on equity funds, which is held for more than a year is nil. The capital gain on equity funds held for less than a year is taxed at 15% as short-term capital gain.

  • Risk factors

There is no guarantee of a return in the case of an ELSS. The funds and the associated risks are actively managed by the fund manager. But, it remains a fact that this tax saver mutual fund has outperformed others many times. In equity fund, the investors can choose the category of the fund based on sector funds, global funds, equity diversified or hybrid, depending on their risk appetite.

Where do investors benefit?

  • For tax-saving purposes, apart from getting good returns, ELSS funds are usually highly preferred.
  • Investors who do not wish to lock their money for a period of three years invest in equity funds that may offer high returns along with liquidity.

Both the investment options are quite similar apart from the tax benefits and the lock-in periods of each. Investors may choose a fund based on their investment purpose and their ability to take risks.