ELSS vs Equity Mutual Fund

Introduction

Individual investors may simply invest in mutual funds by swiftly distributing their money over a variety of assets and asset classes, such as equities or growth-oriented mutual funds. However, your investment and the revenue generated by it are subject to a variety of taxes. But what if you could lower your tax burden as a result of your investment? Any tax-saving alternative would be advantageous to any investor, and ELSS is one of such options to explore.

We will attempt to differentiate the two using many measures to gain a logical and accurate knowledge of different parameters on investing in ELSS and Equity mutual funds. As a result, the following is critical information about ELSS V/s Equity mutual funds that you must be aware of.

What is an Equity Mutual Fund?

Equity Funds are  a type of mutual fund that allocate their assets depending on the investing goals of the underlying program to equities of various firms. These funds are excellent choices for capital growth investments since they have the ability to generate wealth over the long term. Equity funds are a good option for investors who seek exposure to the share market and long-term investments.

In certain ratios, equity mutual funds make substantial investments in the equity shares of several firms. This asset allocation is based on the type of equity fund and how well it matches the investment goal. Depending on the situation of the market, the asset allocation may consist solely of shares of small-cap, mid-cap, or large-cap companies. The remaining funds, after allotting a sizable portion to the equity division, are invested in debt and other money market instruments. This helps manage urgent redemption requests and lower the risk factor.

The major benefits of investing in Equity Mutual funds are: 

● These funds are managed by experts. The professionals research the market, evaluate the performance of numerous businesses, and make investments in the performing stocks that might offer investors the best returns

● Through the SIP (Systematic Investment Plan) mechanism, a person can invest in equity funds for as little as Rs. 100. Due to rupee-cost averaging, investing in equities funds via SIP is a well-liked strategy for reducing risk and reducing market volatility.

● Investors in equity mutual funds are exposed to a variety of stocks. As a result, the investor would be able to profit from the performance even if some of the stocks in the portfolio underperform.

What is ELSS?

The Equity-linked Savings Scheme is an investment in equity shares and equity-related instruments primarily just like any other equity mutual fund. However, it simultaneously facilitates the investor with the relief in taxes in the form of deductions that can be claimed for investments made in any ELSS fund.

One must be aware that the main reinvestment of ELSS is made in a diverse way in equities and equity-related instruments while thinking about ELSS investing sectors. These stocks are growing quite quickly and offer a bigger potential for rewards, but the danger is also substantial.
There is an additional benefit once the fund manager invests in ELSS in accordance with his expertise and experience. The fund manager can move your money based on market conditions because the term granted in this plan is at least three years, and he certainly has more time to play a big part in maximizing your profits through equity investments.

There is a 3-year minimum lock-in term for any ELSS. The invested amount cannot be immediately withdrawn or liquefied. Your investments are secured, and you will pay a steep penalty to withdraw funds before three years have passed. Nevertheless, there are no reinvestment or renewal restrictions for the next three years.

Difference between ELSS vs Equity Mutual Fund

● The tax advantage and the lock-in period are the main distinctions between ELSS and regular equity mutual funds. ELSS draws a lot of investors because of the section 80C tax incentives it offers.

● The ELSS has a lock-in period of 3 years whereas Equity Mutual funds have no such lock-in.

● Mutual fund investments can be withdrawn at any moment, even the next day. The fund management would not have enough time in this situation to allocate and reallocate funds in order to provide the best returns, while ELSS is not the case, offering less liquidity.

● Under ELSS you can claim tax deduction of upto ₹1.5 lakh as under the section 80C of the Income Tax Act 1961. But with Equity Mutual Funds, you can claim no such deductions.

Similarities between ELSS and equity mutual fund

Let us look at the following similarities between ELSS and Equity Mutual Fund:

1. The fundamental idea behind equities mutual fund and ELSS is the same. Your money is combined with others and invested in equities of publicly traded businesses. 

2. The funds and their asset allocation are managed by the fund managers either actively or passively. When redeemed, the AMCs levy an exit load. The yearly maintenance of the fund is deducted from the expense ratio charge.

3. Both have tax repercussions since they are capital gains. If you keep the units for more than a year, you will experience a long-term capital gain. Up to ₹1 lakh, a long-term capital gain is tax-free. Without the advantage of indexation, every long-term capital gain that exceeds ₹1 lakh is taxed at a rate of 10% plus cess. 

4. Any unit you redeem from the program before the 12-month period is subject to taxation as a short-term capital gain. A short-term capital gain is subject to 12% taxation plus a cess.

Why ELSS Over Equity Mutual Funds?

There is no lock-in for typical equity funds, but there is an exit load. As a result, fund managers frequently assess whether their portfolio is sufficiently liquid to accommodate any demand for redemption. Why is this distinct in ELSS? The fund management is able to make long-term judgments about both specific stocks and the portfolio as a whole since every investment has a three-year lock-in period. Additionally, it shows that the administration of the fund is unconcerned about immediate redemption pressure. ELSS frequently have lower turnover ratios than big size funds, also called as churn ratios. One of the main reasons for the somewhat greater returns is due to this.

ELSS mutual funds often provide higher returns than the majority of equity funds. As a result, even individuals who do not desire to reduce their tax burden can participate in ELSS funds to build wealth over time.
 

To Summarize (Tips for Investors)

● Any amount that you wish to invest is allowed in an equity-linked savings plan. However, investments up to Rs 1,50,000 per year are only free from taxes under Section 80C of the Income Tax Act of 1961. It is one of the greatest investment alternatives available since it offers potential for better returns, quick lock-in times, and tax benefits (3 years).

● Both dividends earned by investors and long-term capital gains (LTCG) on ELSS are tax-free up to Rs 1 lakh.

● ELSS carries a higher level of risk than a fixed deposit or PPF, but it also has a bigger potential payoff.

We have tried to cover all the points related to Equity mutual fund Vs ELSS here. By now, you would have gained enough knowledge about the difference between ELSS and Equity mutual Funds and how you could benefit from the same. The overall conclusion that can be drawn is that you should diversify your portfolio by investing in both ELSS and other types of mutual funds.

Helping you invest your hard-earned money the right way is what we aim for at 5Paisa
and vitalize your money and happily see it grow. Visit 5Paisa now and invest in top ELSS and Equity mutual funds.