ELSS vs Mutual Fund: Comparison, Differences, Review

(Last Updated On: June 24, 2017)

ELSS and Mutual funds are similar in nature but serve a completely different purpose to investors. In this post, we discuss ELSS vs mutual funds difference, comparison and review.

Equity Linked Savings Scheme (ELSS)

Equity Linked Saving scheme (ELSS) are open-ended equity mutual fund scheme with the benefit of taxation under Income tax section 80C. The investment made in ELSS are tax exempted up to Rs 150000 under section 80C. These are diversified equity fund suitable for investors who are comfortable to risk and want the benefit of capital appreciation and tax saving. 

Here is the list of ELSS Funds in India

Mutual Funds

Mutual funds are professionally managed funds which pool money from numerous small investors. It invests in equity and debt instrument of publicly traded companies and of government securities. The objectives of mutual funds are wealth maximisation over long term period. There are various types of mutual funds like equity fund, debt fund, balanced fund etc to suit the various financial needs of investors. ELSS are also a kind of mutual fund.

Here is the list of all mutual funds in India.

Comparison Between ELSS and Mutual Funds

Approach to Investment

Investment in ELSS does not restrict to tax saving purpose. It opens the door to the equity investment in a disciplined fashion and returns are more than other tax saving instruments like PPF, NSC. One should check the fund’s return over the long term and the performance of fund manager in managing the portfolio.

Investment into mutual funds is decided by the financial goal, risk appetite, time period of investment of an investor. Mutual Fund’s sole objective is wealth maximisation over long period time.

READ  ELSS vs PPF vs ULIP : Features and Comparison

Lock-in period

Investment in ELSS have 3 years lock-in period where you cannot withdraw funds for at least 3 years and if the investment is done through SIP, then each installment of SIP has to complete the mandatory 3 years lock-in period before it can be liquidated.

Mutual funds don’t have any lock-in period on investment and are highly liquid investment.

Risk Factors

ELSS doesn’t guarantee any return on investment just like Mutual funds as because the management and investment approach are same for both fund types. ELSS funds are actively managed, where risk is managed efficiently by the fund manager. Historically, ELSS has outperformed the traditional tax saving instruments. In mutual funds, investors can choose category of fund according to their risk appetite but investor of ELSS does not have this option

Tax Benefits

The main purpose of ELSS is for tax benefits. The investment made on ELSS is tax exempted under section 80C of Income Tax for the year in which investment has been made up to Rs 1.5 Lakh. Income from dividend and capital appreciation are all tax-free

Mutual Funds enjoy the benefits of taxation for long term investment. Taxation of different fund types is discussed below.

  • Tax obligation for investment in equity mutual fund (those fund with equity portfolio of more than 65%) for period of more than one year are Tax-free and for less than 1 year are taxed 15% short term capital gains tax
  • For Debt fund, investment for a period of 1-3 years are considered short term and it is taxed @ 10% and for more than 3years, it is taxed 20% with the benefit of indexation.
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Fees charged on ELSS are similar to most equity funds. Because of three-year lock-in period, it is exempted from exit load. Most ELSS have an expense ratio of 2.25% with an upper limit of 2.5%.

Investors in Mutual funds are charged for exit load of 0.3%-1% if they redeem their investment within 1 year. Other types of charges are expense ratio which differs from fund to fund on the management style of the fund.

Return Comparison of ELSS and Mutual Fund

FundAUM (Rs. Cr)1yr Return (%)3 yr Return (%)5 yr Return (%)
HDFC Tax Saver517939.4721.6414.92
Franklin- India Taxsheild
DSP Blackrock- Tax Saver Reg Fund172521.1027.0621.19
Mirae- Asset Tax Saver Fund16642.20--
Motilal Oswal- MOSt Focused Long term fund25442.67--
Mutual Funds
HDFC Capital Builder Fund136832.1922.5117.42
ICICI Pru Value Discovery Fund1491926.1827.5221.68
SBI Bluechip fund1093424.0122.1618.46
Birla SL frontline equity fund1488428.6620.8817.17
HDFC Balanced Funds813628.1421,6716.81

Conclusion of ELSS and Mutual Funds

 ELSSMutual Fund
Investment ApproachInvestment into ELSS is done for Tax benefit and wealth appreciationinvestment is done with the goal of wealth maximization over long term
Lock In Period3 years lock in periodNo lock in period
Risk FactorsInvestments carry a risk to market volatility and is riskier than other tax saving instrumentRisks factors are similar to ELSS but varies from equity fund to debt fund
Tax BenefitTax Benefit can be taken up to Rs.1,50,000 maxNo tax benefit. Investment more than one year are tax free
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As discussed above, the only major difference in investing in ELSS than mutual funds is the tax benefit.But it also comes with certain disadvantages like lock-in period, lack of flexibility in a portfolio of the fund and risk on capital.


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