Equity-linked savings schemes (ELSS) are a type of mutual fund that combine investment growth potential with tax-saving benefits. While they share similarities with other mutual funds, understanding the differences can help investors make informed decisions aligned with their financial goals and risk appetite.

Lock-in period and tax benefits

The key distinction of ELSS funds is their lock-in period of three years. Investments in ELSS qualify for tax deductions under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh per financial year. Other mutual funds, such as equity, debt, or hybrid funds, do not offer this tax deduction and generally have no mandatory lock-in period, providing more liquidity to investors.

Investment focus

ELSS funds primarily invest in equities and equity-related instruments, aiming for long-term growth potential. This exposure allows investors to benefit from the potential upside of the stock market but also introduces market volatility. Other mutual funds may follow diverse investment strategies, including debt instruments, balanced portfolios, or sector-specific equities, providing options for varying risk and return profiles.

Risk and return considerations

Due to their equity-heavy allocation, ELSS funds typically carry higher short-term volatility compared with debt or hybrid mutual funds. However, the long-term potential returns of ELSS funds can be significant if market conditions are favourable. Other mutual funds allow investors to choose options aligned with their risk tolerance, ranging from conservative debt funds to moderately risky balanced funds.

Liquidity and investment horizon

ELSS funds have a mandatory three-year lock-in, making them suitable for investors with a medium- to long-term horizon. Other mutual funds offer greater flexibility, with redemption typically possible after a short holding period, depending on the scheme type.

Investors considering ELSS as part of a diversified portfolio may explore schemes offered by Bajaj Finserv mutual fund, which provide structured options for equity exposure with the potential for growth while also offering tax benefits. Consulting a financial planner or investment advisor can help select the right combination of ELSS and other mutual funds to meet personal financial goals and manage risk effectively.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.