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ELSS Or Equity Diversified Mutual Funds

IndianMoney.com Research Team | Updated On Tuesday, June 05,2018, 04:49 PM
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ELSS Or Equity Diversified Mutual Funds

 

 

You simply love investing in equity mutual funds and stocks. The returns you get over the long term, easily beat the returns from FD's and even small savings schemes like PPF and NSC. Yes, the returns from equities are great but, they also carry risk. You have to bear a high risk for high return.  

Now to a different problem. Is it better to invest in ELSS or equity diversified mutual funds? For those who don't know, an equity diversified mutual fund is a mutual fund, that invests in stocks of Companies across different sectors like FMCG, Pharma, Automobiles or BFSI. As Equity diversified mutual funds invest across sectors, they enjoy the diversification benefit. Even if a few sectors collapse, the other sectors may perform well, protecting your investment.

So what is ELSS? Equity Linked Savings Schemes popularly called ELSS, are a type of equity diversified mutual fund. ELSS enjoys the EEE benefits and has a compulsory 3 year lock-in. The money invested in ELSS enjoys a maximum deduction up to Rs 1.5 Lakhs a year under Section 80C. The returns you get and the money withdrawn at maturity are tax free.

So which is better, ELSS or Equity Diversified Mutual Funds? Want to know more on mutual funds? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

 

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ELSS Or Equity Diversified Mutual Funds

 

Studies have shown that ELSS has given better returns than equity diversified mutual funds, over long periods. Many ELSS schemes have outperformed the broader markets over the past 5 years.

ELSS schemes have given tax-free returns over 13% in 3 years and 15-17% in the last 5 years.You must invest in ELSS via Systematic Investment Plans (SIPs) to see good returns.

 
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1. ELSS is called the first mutual fund scheme

 

Many first time investors in mutual funds prefer to invest in ELSS, giving it the name, "first mutual fund scheme". The main reason for this is, you and other investors invest  with the intention of getting tax benefits of up to a maximum of Rs 1.5 Lakhs a year under Section 80C.

After investing in ELSS, many investors then shift to equity diversified mutual funds and other mutual funds giving it the name, first mutual fund schemes. ELSS has a compulsory 3 year lock-in.

The problem is many investors redeem ELSS investments immediately after 3 years. While ELSS schemes give decent returns over 3 years, the returns are considerably higher if you stay invested for 5-7 years.

Stay invested in ELSS for around 5 years and link your investment to a long-term financial goal.

 

SEE ALSO: How To Invest In ELSS This Tax Season?

 

2. Why ELSS may give higher returns than equity diversified mutual funds?

 

ELSS has a lock-in of 3 years. Restrictions on withdrawal, mean there is always money for the fund manager to make excellent investment decisions and generate good profits for investors. This could mean ELSS schemes give better returns than equity diversified mutual funds.

ELSS helps you save a lot in tax if you fall in the highest tax bracket. Let's say you fall in the 30% tax bracket (highest tax bracket). You get a tax deduction under Section 80C of up to Rs 1.5 Lakhs a year, helping you save Rs 45,000 (30% on Rs 1,50,000) a year. This tax saving gives you better returns than equity diversified mutual funds, which don't enjoy this benefit.

ELSS enjoys tax deductions which help generate better returns than equity diversified mutual funds.

 

SEE ALSO: How ELSS Helps You In Financial Planning?

 

Equity diversified mutual funds do score over ELSS in some ways. The lock-in of 3 years can be a hindrance if stock markets crash. You can also redeem an investment in equity diversified mutual funds in an emergency.  Be Wise, Get Rich.

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