How do equity-linked mutual funds compare to traditional equity funds?

Equity-linked mutual funds (ELSS) and traditional equity mutual funds are both popular choices for investors seeking to participate in the stock market. However, the two types of funds differ in terms of tax benefits, investment strategies, and overall risk profiles. Let’s dive into how these two types of equity funds compare.

What are Equity-Linked Savings Schemes (ELSS)?

Equity-linked savings schemes (ELSS) are a type of mutual fund that primarily invests in equities. What sets them apart is that they offer tax-saving benefits under Section 80C of the Income Tax Act in India. They have a mandatory lock-in period of three years, which means your investment cannot be redeemed before this period. ELSS funds are typically suited for investors who are looking for both tax benefits and high returns over the long term.

Pros:

• Tax deduction under Section 80C (up to ₹1.5 lakh).
• Higher potential returns, as the majority of the investment is in stocks.
• Relatively short lock-in period (3 years).

Cons:

• Investment cannot be redeemed during the lock-in period.
• Returns are subject to market risk, and past performance doesn’t guarantee future returns.

What are Traditional Equity Funds?

Traditional equity funds, on the other hand, are mutual funds that invest primarily in stocks with the goal of generating returns through capital appreciation. These funds do not offer tax-saving benefits like ELSS but do provide flexibility as there is no lock-in period. Investors can redeem or switch these funds at any time, making them more liquid than ELSS.

Pros:

• No lock-in period, offering liquidity and flexibility to investors.
• Investments can be redeemed or switched based on market conditions or personal financial goals.
• Ideal for long-term investors looking to grow their wealth through stock market investments.

Cons:

• No tax-saving benefit like ELSS.
• Exposed to market risk with the potential for higher volatility.

Key Differences Between ELSS and Traditional Equity Funds

Here’s a quick comparison to help you understand the key differences between ELSS and traditional equity funds:

When deciding between ELSS and traditional equity funds, it all depends on your financial goals, time horizon, and risk appetite. If you are looking for tax-saving benefits along with equity exposure, ELSS may be the right choice for you. However, if you need liquidity and flexibility without the constraint of a lock-in period, traditional equity funds might be a better option.