Category : Investing Guides October 9, 20255 minutes read
If you’re exploring investment options, you’ve probably come across ELSS and mutual funds—and wondered if they’re the same thing. While ELSS is technically a type of mutual fund, it’s designed with a specific purpose: saving tax. In contrast, mutual funds come in many types—equity, debt, hybrid—and not all of them can help you claim tax deductions.
The main difference between ELSS and mutual funds lies in their features and benefits. ELSS invests in equities and comes with a 3-year lock-in period, but it also lets you claim tax deductions under Section 80C of Income Tax Act, 1961. On the other hand, regular equity mutual funds give you more flexibility—no lock-in, wider strategy—but without the tax perks. So, when comparing ELSS vs MF, it really comes down to your goal: are you looking to save on taxes, or do you want more freedom with your investment?
A mutual fund is a way for individuals to invest in a diversified portfolio of stocks, bonds, or other securities without having to pick them individually. It pools money from many investors and is managed by professionals. Mutual funds come in different types—equity, debt, hybrid—depending on your risk appetite and financial goals.
ELSS, or Equity Linked Savings Scheme, is not a separate investment product—it’s actually a type of equity mutual fund. The key difference is that ELSS comes with tax-saving benefits under Section 80C of Income Tax Act, 1961 and a mandatory lock-in period of three years. Many people think of ELSS and mutual funds as completely different, but it’s important to understand that ELSS is part of the mutual fund family, just with a tax-saving twist.
This guide will help you understand the difference between equity mutual fund and ELSS. It will cover how each of these investment types work, their tax implications, lock-in periods, risk levels, and which one may suit your financial needs better.
Mutual funds are a popular investment option where money from multiple investors is pooled together and invested in a diversified portfolio of assets like stocks, bonds, or other securities. These funds are managed by professionals who aim to generate returns based on the fund’s investment objective. Whether you’re a beginner or a seasoned investor, mutual funds make it easy to invest in the market without needing deep knowledge or active involvement.
Mutual funds come in various types—equity, debt, hybrid, index, etc.—and are tailored to suit different goals and risk levels. For instance, equity mutual funds focus on stock investments and are suitable for long-term growth, while debt funds prioritize safety and relatively consistent returns. Understanding mutual funds is important when comparing ELSS and mutual funds, because ELSS is actually a type of equity mutual fund, not a separate investment.The difference between ELSS and other mutual funds mainly lies in tax benefits and lock-in periods, not the basic structure of the investment.
Features of Mutual Funds
Mutual funds offer several investor-friendly features that make them a convenient and versatile investment vehicle. Let’s understand a few of them:
Liquidity
Most mutual funds are highly liquid, meaning you can buy and sell units on any business day (except in closed-end funds or ELSS during the lock-in). This flexibility may suit investors who may need access to their money at short notice. This is one key difference between ELSS and other mutual funds—ELSS has a 3-year lock-in, while most other mutual funds allow withdrawals anytime.
Diversification
One of the biggest advantages of mutual funds is portfolio diversification. Your money is spread across different securities, industries, and even asset classes, reducing the overall risk. This feature applies to both regular equity funds and ELSS, though the portfolio strategy may differ depending on the fund manager.
Flexibility
Mutual funds give you the freedom to choose how and when you want to invest. Whether you’re looking for short-term gains, long-term growth, or regular income, there’s a fund for every need. Also, you have multiple investment modes like:
- SIP (Systematic Investment Plan): Invest small amounts regularly.
- STP (Systematic Transfer Plan): Shift money gradually from one mutual fund to another.
- SWP (Systematic Withdrawal Plan): Withdraw a fixed amount regularly from your investment.
These options allow you to manage your investment journey in a structured and convenient way.
Start an SIP and unlock the potential long-term benefits of investing in mutual funds.
Mutual funds pool money from multiple investors to invest in a diversified mix of assets, managed by professionals. They’re beginner-friendly and come in various types like equity, debt, hybrid, and index funds to suit different goals and risk levels. ELSS is a type of equity mutual fund with tax benefits and a 3-year lock-in, unlike most mutual funds that offer easier liquidity. Key features include diversification, flexibility in investment modes (like SIP, STP, and SWP), and varying levels of accessibility based on fund type. These traits make mutual funds a versatile option for building wealth over time.
ELSS, or Equity Linked Savings Scheme, is a type of equity mutual fund that not only helps you grow your wealth in the long run but also offers tax-saving benefits. Many investors often compare ELSS vs MF, thinking they’re entirely different. However, it’s important to understand that ELSS is not a separate investment scheme—it falls under the broader mutual fund umbrella. The difference between ELSS and other mutual funds mainly lies in its tax benefits and a mandatory lock-in period, which makes it unique among equity funds.
When you invest in an ELSS fund, your money is primarily invested in equity markets, aiming for long-term capital appreciation. At the same time, you can claim a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961 making it a dual-purpose investment—long term wealth creation and tax saving.
Read more about how to save tax.
Features of ELSS
ELSS funds are particularly popular among new investors and salaried individuals because they combine the potential of equity with tax-saving benefits. Let’s explore the key features of ELSS:
Tax-Saving
One of the biggest advantages of ELSS is that it qualifies for tax deductions under Section 80C of the Income Tax Act, 1961 up to ₹1.5 lakh per financial year. This makes ELSS an excellent entry point for those looking to save on taxes while participating in the growth potential of the equity market. This tax benefit is one of the main differences between equity mutual funds and ELSS.
Lock-In Period
ELSS funds come with a mandatory lock-in of 3 years, which is the shortest among all tax-saving investment options under Section 80C. During this period, you cannot redeem your investment. While this may seem like a limitation when compared to other mutual funds, it encourages a disciplined, long-term investment approach.
Long-Term Wealth Creation
Since ELSS invests primarily in equity markets, it has the potential to generate higher returns over the long run compared to traditional tax-saving instruments like PPF or NSC. The 3-year lock-in also gives fund managers more freedom to manage the portfolio without worrying about frequent redemptions, which can help in better compounding of wealth over time.
Unlock the dual benefit of potential wealth creation and tax-saving by investing in an ELSS fund with Bandhan Mutual Fund.
ELSS (Equity Linked Savings Scheme) is a type of equity mutual fund that offers both tax-saving benefits and long-term growth potential. Unlike other mutual funds, ELSS qualifies for deductions under Section 80C and has a mandatory 3-year lock-in period. It invests mainly in equities, aiming to build wealth while offering tax relief up to ₹1.5 lakh per year. Though often compared to regular mutual funds, ELSS is not a separate product but a specific category within them, ideal for disciplined, goal-oriented investing.
Now let’s understand the key differences between ELSS and mutual funds:
| Parameters | ELSS | Mutual Funds |
| Meaning | A tax-saving equity mutual fund with a 3-year lock-in, eligible for deductions under Section 80C of Income Tax Act, 1961. | A broad category of investment schemes pooling money into equity, debt, or hybrid assets. |
| Expense Ratio | Generally slightly higher due to active equity management and long-term focus. | Varies across fund types (equity, debt, hybrid); can be lower or higher depending on strategy. |
| Liquidity | Locked in for 3 years; cannot be withdrawn before the lock-in period ends. | Relatively liquid; you can redeem open-ended mutual fund units anytime (except certain close-ended funds). |
| Potential returns | Higher long-term returns potential due to equity exposure, though performance depends on market trends. | Returns depend on the fund type—equity (higher), debt (moderate), hybrid (balanced). |
| Risks | Market-linked, so subject to equity volatility; riskier than debt options but has long-term potential. | Varies by fund type—equity funds are riskier; debt funds can be potentially stable. |
| Tax | Eligible for ₹1.5 lakh deduction under Section 80C; | Taxation varies: Equity funds have LTCG and STCG rules; debt funds have different tax treatment. |
- ELSS is a type of mutual fund, specifically an equity mutual fund, and not a separate investment product.
- Mutual funds pool money from various investors to invest in stocks, bonds, or other assets. They are professionally managed and come in multiple types like equity, debt, and hybrid funds.
- ELSS (Equity Linked Savings Scheme) is a mutual fund with dual benefits—tax savings under Section 80C and long-term wealth creation through equity investments.
- The main difference between equity mutual funds and ELSS is that ELSS has a 3-year lock-in period and tax benefits, whereas regular equity mutual funds offer more liquidity and no tax deductions.
- In the ELSS vs MF comparison, ELSS suits those seeking tax deductions, while other mutual funds are more flexible and suited for varying financial goals.
- Mutual funds are highly liquid, allow SIP, STP, SWP options, and offer broad diversification—great for beginners and experienced investors alike.
- ELSS funds, while locked in for 3 years, often see better portfolio management due to the absence of early redemptions, potentially improving long-term returns.
- Returns in ELSS and mutual funds depend on market performance, but ELSS focuses solely on equities, making it riskier but with higher long-term potential.
- Taxation is another major differentiator: ELSS gives a deduction up to ₹1.5 lakh under Section 80C, whereas other mutual funds are taxed based on fund type and holding period.
- Overall, the difference between ELSS and mutual funds comes down to tax benefits, lock-in period, and liquidity—choose ELSS for tax saving, or other mutual funds for goal-based investing flexibility.
