How Is ELSS Different From A Mutual Fund?

How Is ELSS Different From A Mutual Fund?

 

Most people talk about ELSS (Equity Linked Savings Scheme) and Mutual Funds interchangeably. The confusion stems from the fact that both the investment options espouse the same investment philosophy – diversification of funds. Though ELSS is a type of Mutual Fund too, the two are mutually exclusive in the way you would invest in them. The following conversation will help you understand the differences between the two.

A: Hey, what is an ELSS?

B: ELSS is a type of a Mutual Fund. You hand over your money to an asset management company and they will invest it for you in equities, debt markets, etc.

A: It sure sounds like a Mutual Fund.

B: Well, ELSS is a type of Mutual Fund. They work the same way. Your asset management company will pool your money with that of the 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.

A: So, how does ELSS differ from other Mutual Funds? I don’t spot any difference.

B: The difference is that an ELSS comes with a lock-in period of 3 years. You cannot withdraw your funds before 3 years. Other Mutual Funds don’t come with a lock-in period.

A: Hmm…If ELSS and Mutual Fund are the same then why should I lock my money in an ELSS for 3 years?

B: 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.

A: What if I am looking for good returns?

B: Keep in mind, both ELSS and other Mutual Funds are long-term investment options. You will reap little benefits in the short-term. So, if you are planning to invest in either of the two options, be ready for a long wait.

In a nutshell, an ELSS primarily helps with tax savings while regular Mutual Funds are more liquid.

A: Does this change the way I invest in the two? Should I opt for a lump sum amount or instalments?

B: Since ELSS has a lock-in period of 3 years, it’s advisable to invest your money in a lump sum. If you invest your money in instalments, each instalment will get locked in for 3 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 a regular Mutual Fund, paying in instalments is a good option. Each instalment will compound with the previous payments and bring huge returns in the long run.

By the way, when you invest money in a Mutual Fund in instalments, it’s called a Systematic Investment Plan (SIP).

A: What is the benefit of an SIP?

B: 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.

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

B: ELSS and 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 7 years and NSC’s have a lock-in period in line with the maturity tenure.

 

Happy Investing

Source:Bankbazaar.com