ELSS vs Mutual Funds: Which One Truly Gives You a Special Edge?

Mutual funds have always been a popular investment option in India, thanks to their flexible nature and potential for wealth creation. One category often stands out among the various mutual fund schemes: ELSS (Equity Linked Saving Scheme).

But what exactly makes ELSS different from other mutual funds? Is ELSS better than regular mutual funds? What special benefit do investors get from choosing ELSS over other options?

In this article, we’ll break down the core differences between ELSS and other mutual funds and explore how ELSS can be a more intelligent choice depending on your financial goals.

Understanding ELSS: A Mutual Fund with Tax Benefits

ELSS, or Equity Linked Saving Scheme, is a mutual fund primarily investing in equity and equity-related instruments. ELSS’s tax-saving feature under Section 80C of the Income Tax Act 1961 makes it unique. Investors can claim a deduction of up to ₹1.5 lakh in a financial year by investing in ELSS.

This feature sets ELSS apart from most other mutual funds that do not provide tax benefits. But there’s more to ELSS than just saving taxes.

Let’s dig deeper into what makes ELSS different from other mutual funds.

Significant Differences Between ELSS and Other Mutual Funds

1. Tax Benefits: The Most Attractive Feature of ELSS

• ELSS: Offers tax deduction of up to ₹1.5 lakh under Section 80C. This means you can reduce your taxable income and save up to ₹46,800 annually (if in the highest tax slab).
• Other Mutual Funds: Do not offer tax benefits under Section 80C. Regular equity or debt mutual funds are fully taxable under the capital gains rules.

👉 This special benefit makes ELSS so appealing to salaried and middle-income investors.

2. Lock-in Period: Shortest Among Tax-Saving Options

• ELSS: Has a mandatory lock-in period of just 3 years.
• Other Equity Funds: No lock-in period; you can redeem anytime.
• Tax-saving alternatives like PPF and NSC have more extended lock-in periods (15 years and 5 years, respectively).

So, even though ELSS has a lock-in period, it’s the shortest among all tax-saving instruments and gives higher return potential.

3. Returns: Market-Linked and Long-Term Focused

• ELSS: Since it invests mainly in equities, the returns depend on market performance. Over the long term, ELSS can give average annual returns of 10–14%, higher than most fixed-income instruments.
  • Other Mutual Funds: Equity Funds: Similar or higher returns, but no tax-saving.
  • Debt Funds: Lower risk, but returns are also in the 6–8% range.

ELSS is a dual-benefit option for long-term investors seeking wealth while saving taxes.

4. Risk Factor: ELSS Is Not Risk-Free

• ELSS, like all equity-oriented mutual funds, carries market risk. If the stock market performs poorly, the fund may deliver low or even negative returns in the short term.
• Other mutual funds offer a wide range of risk levels. Debt funds, for instance, are less risky but give lower returns.

👉 ELSS suits those with a moderate to high-risk appetite and a long-term horizon.

5. Capital Gains Tax: Taxation after Lock-in

Even after the lock-in period, your ELSS gains are not entirely tax-free.

• ELSS & Equity Funds: Long Term Capital Gains (LTCG) above ₹1 lakh in a financial year are taxed at 10% without indexation.
• Debt Funds: Gains are taxed based on the income tax slab (post-recent changes).

Still, the initial tax deduction and high return potential make ELSS a more balanced offering.

ELSS Is a Mutual Fund — But a Very Special One

It’s important to understand that ELSS is a mutual fund — specifically, it is an equity mutual fund category with a tax-saving advantage. So, when we compare ELSS with “mutual funds,” what we actually mean is a comparison with other mutual fund categories such as:

• Large Cap Funds
• MidCap Funds
• Hybrid Funds
• Debt Funds
• Thematic or Sectoral Funds

ELSS performs a dual role:

1. Acts as an equity investment vehicle
2. Offers tax deduction under Section 80C

These features make it the only mutual fund in India that helps in tax planning and wealth creation.

Who Should Choose ELSS Over Other Mutual Funds?

While other mutual funds offer more flexibility and wider choice, ELSS is ideal for:

• First-time investors who want to start with equity and enjoy tax savings.
• Salaried professionals looking for 80C options beyond traditional schemes like PPF or LIC.
• Young investors who can afford to take risks and have a long-term view.
• Tax-conscious individuals who want to combine tax saving with wealth generation.

SIP or Lump Sum: Best Way to Invest in ELSS

SIP (Systematic Investment Plan) and lump sum investment are allowed in ELSS. However, SIP offers several advantages:

• It reduces risk through rupee cost averaging.
• You can start with as low as ₹500 per month.
• Each SIP installment will have a separate 3-year lock-in, but it promotes disciplined investing.

For most retail investors, SIP in ELSS is the best strategy, especially if they plan for long-term goals like retirement, a child’s education, or buying a house.

ELSS vs. Other 80C Investment Options

Many people compare ELSS with other tax-saving instruments under 80C, such as:

Instrument Lock-in Period Return Type Return (%) Tax-Free Return Risk Level

ELSS 3 years Market-Linked 10–14% No Moderate-High

PPF 15 years Fixed 7–8% Yes Very Low

NSC 5 years Fixed 6.8–7.7% No Low

FD (Tax Saver) 5 years Fixed 6–7% No Low

ULIPs 5 years Market + Insurance Varies Partly High

👉 Among all these, ELSS has the shortest lock-in, highest potential return, and the benefit of equity exposure, making it a unique offering under Section 80C.

Should You Replace Your Mutual Fund Portfolio with ELSS?

No, ELSS should not replace your entire mutual fund portfolio. It should be a part of your portfolio for tax-saving purposes.

Use ELSS for:

• Saving taxes under Section 80C
• Long-term goals (minimum 5-year horizon)
• Equity exposure if you’re starting

Use other mutual funds for:

• Medium-term goals (Debt/Hybrid Funds)
• Diversification (Large, Mid, and Small Cap Funds)
• Liquidity (No lock-in funds)

Think of ELSS as your bridge between tax saving and wealth creation, not your only investment.

Final Thoughts: ELSS Offers More Than Just Tax Benefits

If you’re planning to invest in mutual funds and also want to save taxes, ELSS is a powerful option. It’s the only mutual fund that offers tax savings, provides equity growth, and has a relatively short lock-in period.

While ELSS is not risk-free, the special benefit of tax deduction combined with potential long-term returns makes it a superior choice for goal-oriented investors.

Sources: SEBI India, AMFI India, SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund