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ELSS Vs Equity Mutual Funds

Newbie investors sometimes need clarification on equity funds and equity-linked savings scheme (ELSS) mutual funds. ELSS is an equity mutual fund with a tax rebate and a lock-in period. Its portfolio is similar to that of any diversified large-cap equity fund. Before making an investment decision, read everything about tax-saving mutual funds vs other equity mutual funds. 

What Is an Equity Mutual Fund?

Equity mutual funds invest a large part of their corpus in the stocks of companies on the lists of Indian and overseas stock exchanges. They invest across multiple market cap segments and sectors. The investment goal is long-term capital growth and appreciation. The returns are subject to risk since they are market-linked. So, you may witness short-term volatility. To ride through shorter-term market ups and downs, it's best to stay invested for 5-7 years to make the most of your investments. When you redeem your investment in an equity fund, the asset management company (AMC) levies an exit load. Therefore, an actively managed mutual fund has a higher expense ratio than a passively managed fund. 

What Is an ELSS Mutual Fund?  

Like any equity fund, an ELSS mutual fund invests a large percentage of its corpus in the listed companies stocks. An ELSS fund is also exposed to market risk and helps create long-term wealth. Moreover, it acts as a tax-saving mutual fund as it qualifies for a tax rebate of up to ₹1,50,000 under the Income Tax Act, Section 80C. The fund comes with a 3-year lock-in period from when its units are bought. This is for taxation. You can remain invested even after this period expires. This can usually help increase the chances of earning better returns. 

Differences Between ELSS and Equity Mutual Fund

Section 80C Tax Savings: Only with an ELSS mutual fund can you enjoy the tax benefits under Section 80C. These benefits are not available in the case of other equity funds. 

Lock-in Period: Unlike other equity mutual funds, a tax-saving mutual fund has a lock-in period of 3 years. 

Liquidity: An equity-linked savings scheme offers much less liquidity than equity mutual funds. You cannot sell it during the lock-in period. However, equity funds are highly liquid, and you can withdraw your investments anytime. Nevertheless, staying invested for an extended period is a good idea to even out any short-term losses. 

Conclusion

Now that you know the differences between equity and tax-saving mutual funds, compare their pros and cons and choose based on your preferences, like more tax benefits or higher liquidity. Whichever scheme you pick, make sure to select a reputed AMC.

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