What is the Difference between ELSS and Mutual Fund?

Before investing one must know the basic notion about Mutual Funds and ELSS. Let us discuss Mutual Funds and ELSS in brief:

What is a Mutual Fund?

Mutual Fund is a trust that pools together the resources of investors to make a foray into investments in the capital markets. The fund is managed by a professional fund manager who invests the collected money in various stocks, bonds, or other securities according to the fund’s specific investment objectives. The net income earned on the funds, along with the capital appreciation of the investment, is shared amongst the unit holders in proportion to the units (NAV) owned by them. Mutual Fund is therefore an indirect vehicle for the investor investing in capital markets. In return for administering the fund and managing its investment portfolio, the fund manager charges fees based on the value of the fund’s assets. An investor can invest through investment apps in India as per their investment objectives.

What is an ELSS?

ELSS stands for Equity Linked Savings Scheme. It is a tax-saving investment option under section 80C of the Income Tax Act, 1961. It is the type of mutual fund where an investor can claim a tax rebate of up to Rs 1,50,000 and thereby make savings in taxes. ELSS mutual funds’ asset allocation is mostly made towards equity, i.e., 65% of the total portfolio in equity-linked securities such as listed shares. They may have some exposure to fixed-income securities as well. The lock-in period of ELSS is three years which is the shortest among all Section 80C investments. Like other mutual funds, an investor can invest through any investment apps India.

Difference Between ELSS and Mutual Funds

  • The vital distinction between ELSS and any other equity mutual fund is the tax benefit and the lock-in period. When the amount is invested in ELSS mutual funds, an investor gets a deduction of Rs.150,000. However, there is no deduction of the amount invested in Mutual Funds.
  • ELSS offers tax deductions of up to Rs 1,50,000 in a year under Section 80C of the Income Tax Act, 1961. It comes with a lock-in period of three years and there are no provisions to make a premature exit. ELSS mutual funds are one of the few tax-saving investments with the potential to offer inflation-beating returns. A person making investments in ELSS mutual funds gives the investors the twin benefits of tax deductions as well as wealth creation. The portfolio of ELSS funds mostly consists of equities, while they have some exposure towards fixed-income securities.
  • Mutual funds mobilise funds by selling their shares known as units. This gives the benefit of convenience and satisfaction of owning shares in many industries. The mutual fund invests in various securities and passes on the return to the investors. The basic character is that it provides an ideal avenue for investment for investors and enables them to earn a reasonable return with better liquidity. Mutual funds provide their investors with the benefit of professionals or experts who manage the investment portfolios efficiently. Investors are relieved from the responsibility of following the markets regularly.
  • Unlike the mutual fund’s scheme, when the investors redeem the mutual fund under ELSS, the capital gain is tax-free and exempt. Most investment apps in India provide a statement of capital gains to help investors in tax filing.

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