How to choose between ELSS and equity funds?
People new to the world of mutual funds are often at crossroads when it comes to choosing between investing in ELSS and equity funds. Well, before we delve into the pros and cons of each let us first take a look at what they actually mean. Equity Linked Savings Scheme, popular by its acronym ELSS is a equity mutual funds which provides tax benefits along with substantial market linked returns. This quality earned it the title of “Tax Saving Mutual Fund”. Investing up to 1,50,000 rupees in ELSS is liable for tax deductions under Section 80C of the Income Tax Act. Equity funds on the other hand, are a category of mutual fund that invests its collected money in equity shares and stocks of various companies. However, investment in equity funds does not attract tax benefits. However, one of the dilemmas that investors always face is choosing between ELSS and equity funds
Unlike equity funds, which do not have a lock-in period, ELSS has a 3 year lock-in period. Due to this equity funds have to bear the brunt of exit load. As a result, fund managers need to keep a constant check to ensure that the liquid pool is sufficient to cater to any unexpected redemption pressure. Funds managers of ELSS are not under this pressure and so they can take long term decisions regarding the funds without having to worry about redemption loading in the short run.
When the market is bearish, investors in equity funds often look for exits and this puts additional pressure on the fund managers and the funds. In contrast, the investors in ELSS are locked-in and so the fund manager is saved from this additional loading of redemption. Due to this, stability is maintained in the portfolio up to a great extent.
So we see that apart from tax saving, investors also view ELSS as more stable funds and a means to augment their returns in the long run. Many see this as a safe investment avenue and do not worry about the lock-in period. So if you are one of them then ELSS is the right choice for you.
Happy investing!
