How Is ELSS Different From A Mutual Fund?

By | April 29, 2018

Many people talk about ELSS investments and Mutual Funds interchangeably. ELSS is a type of Mutual Fund. Other types of Mutual Funds include balanced funds, debt funds, etc.

How Is ELSS Different From A Mutual Fund?

Many people talk about ELSS (Equity Linked Savings Scheme) and Mutual Funds interchangeably. ELSS is a type of Mutual Fund. Other types of Mutual Funds include balanced funds, debt funds, etc. Mutual Funds can be categorised based on their time horizon (long, medium, and short-term funds) or based on the asset class. The following conversation will help you understand the differences between ELSS Mutual Funds and other types of Mutual Funds.

Could you tell me what a Mutual Fund is?

A Mutual Fund investment scheme collects money from people and invests the pool of funds in various assets. The money collected from various investors is usually invested in financial securities like shares and money-market instruments like a certificate of deposit and bonds.

Equity, debt and money-market instruments are broad classifications of asset classes. These investments may be made for the short term, medium term or long term. The kind of asset invested in also determines the risk factor of the funds.

Hey, what is ELSS?

ELSS or an equity-linked saving scheme is a type of equity-diversified Mutual Fund . You hand over your money to an asset management company and they will invest it for you, mainly in equities.

This investment scheme is fast becoming a popular choice as it not only helps create wealth but also doubles as a tax-saving profitable investment option.

The tax benefits offered by ELSS fall under the section 80C of the I-T Act and offer tax exemptions of up to Rs. 1.5 Lakhs. Now, even if a person falls under the maximum tax bracket of 30%, that person can save a maximum of Rs. 45,000 on tax. That’s a tidy sum.

The funds invested in by ELSS primarily revolve around equities and related equity products. These schemes come with a lock-in period of three years – the primary factor that differentiates an ELSS from any other type of Mutual Fund. Investors cannot access their funds during the lock-in period, and this ensures continued savings.

Additional Reading: Popular ELSS Funds 2018

It sure sounds like any other type of Mutual Fund.

Well, as an ELSS is a type of Mutual Fund, they work the same way. Your asset management company will pool your money with that of other investors and invest it across sectors. Hence the name Mutual Fund. You see, a bigger pool of money will attract greater returns, and losses can be spread out too.

So, how does an ELSS differ from other Mutual Funds? I don’t see any difference.

The difference is that ELSS funds invest mainly in equities. Furthermore, they come with a lock-in period of three years. What this means is that you cannot withdraw your funds before three years. Other Mutual Funds don’t come with a lock-in period.

Hmm… what benefit do I get from locking my money in an ELSS for three years?

Good question! When you invest in an ELSS, you become eligible for tax sops under Section 80C of the Income Tax Act and you can claim tax deductions. Other Mutual Funds do not offer this benefit.

 Additional Reading: ELSS 101: To Invest Or Not To Invest?

A: Should I opt for a lump sum amount or instalments?

Since ELSS funds have a lock-in period of three years, it’s advisable to invest a lump sum of money. If you invest your money in instalments, each instalment will get locked in for three years. It’s always good to invest in an ELSS when the markets are down. The stock prices will be down and you will reap good returns when stock prices rise with an improving economy.

However, if you are investing in any other type of Mutual Fund, consider a Systematic Investment Plan (SIP) or SIP. This means investing a fixed amount at regular intervals. When markets are low, you’ll be able to get a higher number of units and when the markets are high, you’ll get fewer. This will result in rupee-cost averaging and could reduce your investment risk in the long run.

What is the benefit of an SIP?

An SIP is a disciplined and planned approach towards investing in a Mutual Fund. You invest a certain amount of money at regular intervals. This helps you plan your budget ahead of the payment date. With an SIP, you can also keep a track of how much you have invested and what returns you are receiving on your investments.

How are ELSS Mutual Funds different from a PPF and NSC?

ELSS Mutual Funds don’t have a maturity period or maximum investment amount. Public Provident Fund (PPF) and National Savings Certificate (NSC) have a fixed maturity period and there is a cap on the money you can invest in a year. PPFs have a lock-in period of seven years and NSC’s have a lock-in period in line with the maturity tenure.

Additional ReadingPPF vs ELSS

Here’s a quick overview of different types of Mutual Funds

Open-ended Funds

These schemes are open for investment at any point in time. They offer liquidity to investors since units can be bought and sold freely.

Sub-categories Of Open-Ended Funds

Debt/Income Funds

Under this scheme, investments are made in bonds and treasury bills. Money invested in such a fund can be put into monthly income plans, short-term plans, flexible maturity plans, etc. These investments have a very low-risk factor and low returns as well. They are ideal for those who are looking for a safer environment for their money to grow in.

Money Market/Liquid Funds

These funds invest in treasury bills and fixed-income securities among other instruments like short-term bank certificates of deposits. The purpose of these funds is to provide investors with liquidity hence they come with short maturity periods of about 90 days.

Equity/Growth Funds

Equity or growth Mutual Funds are those where the money of the investors is invested in equity stocks with the idea of either generating an income or capital gains. Sometimes they can be invested with the purpose of generating both gains and income.

Balanced Funds

As the name suggests, this fund invests in a balanced way between fixed-income securities and equity funds so as to provide investors with the opportunity to invest aggressively but with caution.

Additional Reading: How Small-Town India Has Joined The Mutual Fund Movement

Close-ended Funds

These funds remain open only for a short period of time. Once the scheme is closed, fresh investments cannot be made. In order to provide liquidity, these units are listed on stock exchanges and investors can trade in them.

Sub-categories Of Close-Ended Funds

Capital Protection Funds

The capital-protection Mutual Fund invests in both fixed-income securities and equity plans, but the investment in equity is marginal since the aim of the scheme is to safeguard the principal while still getting returns.

Fixed Maturity Plans

These plans, unlike most other plans, may come with the lowest charges for the scheme because they are not managed actively like other funds. In a fixed maturity plan, the investment is made mostly in debt instruments that mature along the same timeline as the fund.

Additional Reading: Daily SIP Mutual Funds- What’s The Impact On Your Returns?

Interval Schemes

Interval schemes are a variation of close-ended schemes that are reopened for redemption for a limited period of time during the scheme’s tenure. Investors are given the option to sell their units back to the fund during this period.

We have a host of Mutual Funds including tax-saving ELSS options to choose from. Check them out now!

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Category: ELSS Mutual Funds

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