Articles
Mutual Funds
ELSS vs Mutual Funds - Key Differences and Which is Better

ELSS vs Mutual Funds - Key Differences and Which is Better

Table of content

What is ELSS (Equity Linked Savings Scheme)?
Key Features of ELSS:
What are Mutual Funds?
Types of Mutual Funds:
Key Features of Mutual Funds
Key Differences Between ELSS and Mutual Funds
Advantages of Investing in ELSS
Advantages of Investing in Mutual Funds
Which is Better: ELSS or Mutual Funds?
Conclusion

ELSS vs Mutual Funds - Key Differences and Which is Better

Mutual funds offer a wide range of investment options to cater to different financial goals, risk appetites, and investment horizons. Among them, ELSS (Equity Linked Savings Scheme) stands out due to its tax-saving benefits under Section 80C of the Income Tax Act. However, investors often struggle to decide between ELSS and other mutual funds when planning their investments.

This article provides a detailed comparison of ELSS vs Mutual Funds, explaining their differences, advantages, and suitability for different investors. By the end, you will be able to answer "Is ELSS better than MF?" based on your needs.

What is ELSS (Equity Linked Savings Scheme)?

ELSS (Equity Linked Savings Scheme) is a type of equity mutual fund that comes with tax-saving benefits under Section 80C. It primarily invests in equities and equity-related instruments, aiming for long-term capital appreciation.

Key Features of ELSS:

Tax Benefits: Investments in ELSS qualify for deductions of up to ₹ 1.5 Lakhs under Section 80C.
Lock-in Period: ELSS has a mandatory lock-in of 3 years, which is the least among other popular tax-saving investment options.
Market-Linked Returns: Since ELSS invests in equities, returns are market-dependent and can fluctuate.
Growth and Dividend Options: Investors can choose between growth (capital appreciation) and dividend (periodic payouts) options.
High Risk, High Reward: Being equity-oriented, ELSS carries higher risks but offers the potential for superior long-term gains.

What are Mutual Funds?

A mutual fund is an investment vehicle that pools capital from various investors and invests it in a diversified portfolio of equity, debt, and other types of assets, depending on the type of fund. These funds are managed by professional fund managers, who make investment decisions based on the fund’s objective. Mutual funds are suitable for investors who want to grow their wealth over time without actively managing their investments. Unlike ELSS, mutual funds are not restricted to equities and do not have tax-saving benefits.

Types of Mutual Funds:

Mutual funds are categorised based on their investment structure, asset allocation, and objectives.

1. Based on Asset Class

Equity Mutual Funds – Invest primarily in stocks and have the potential for high returns, but come with higher risks.
Debt Mutual Funds – Invest in fixed-income securities like government bonds, corporate bonds, and treasury bills, with lower risk.
Hybrid Mutual Funds – A mix of equity and debt, balancing risk and return for investors who want moderate growth with reduced volatility.
Commodity Mutual Funds – Invest in commodities like gold and silver, offering an alternative investment avenue.
Real Estate Funds – These funds invest in real estate projects, REITs, or real estate-related companies.

2. Based on Structure

Open-Ended Mutual Funds – Allow investors to buy and sell units anytime, offering high liquidity.
Close-Ended Mutual Funds – Have a fixed tenure and can only be redeemed after maturity.
Interval Funds – A hybrid between open-ended and close-ended funds, allowing investors to redeem units at specific intervals.

3. Based on Investment Goals

Growth Funds – Aim for capital appreciation by investing in high-growth stocks.
Income Funds – Focus on generating regular income through dividends and interest.
Index Funds & ETFs – Passively track a market index like NIFTY 50 or SENSEX, offering lower expense ratios.
Sectoral/Thematic Funds – Focus on specific sectors like IT, pharma, or infrastructure. These are high-risk, high-reward investments.

Key Features of Mutual Funds

Diversification – Spreads investment across various asset classes, reducing overall risk.
Professional Fund Management – Managed by experts who analyze and select investments.
Liquidity – Open-ended funds allow investors to redeem their investments anytime.
Systematic Investment Plan (SIP) – Allows investors to invest small amounts regularly, promoting disciplined investing.
Risk-Based Categories – Investors can choose between low, moderate, and high-risk funds.
Transparency – Fund houses provide regular reports on NAV, holdings, and fund performance.
Regulation & Security – Mutual funds in India, including ELSS, are regulated by SEBI (Securities and Exchange Board of India), ensuring investor protection.

Key Differences Between ELSS and Mutual Funds

The table below highlights the difference between ELSS and Mutual Fund investments:

Aspect	ELSS	Other Mutual Funds
Purpose	Primarily for tax-saving under Section 80C	Wealth creation, income generation, or liquidity
Tax Benefits	Eligible for ₹1.5 lakh deduction under Section 80C	No tax benefits (except for retirement or tax-saving funds)
Lock-in Period	3 years	No lock-in (except close-ended funds)
Investment Type	Invests mainly in equities	Can invest in equities, debt, or hybrid instruments
Risk Level	High, due to equity exposure	Varies (equity funds are risky, debt funds are low risk)
Liquidity	Low (since funds are locked for 3 years)	High, as most mutual funds allow redemption anytime
Return Potential	Higher in the long term	Varies based on fund type
SIP Availability	Yes	Yes
Capital Gains Tax	LTCG (above ₹1.25 lakh taxed at 12.5%), STCG taxed at 20%	LTCG/STCG tax depends on fund type (equity or debt)

Advantages of Investing in ELSS

Tax Savings: ELSS is one of the best options under Section 80C for reducing taxable income.
Shortest Lock-in Among Tax-Saving Investments: Compared to PPF (15 years) and NSC (5 years), ELSS has a much shorter lock-in.
Potential for High Returns: Since ELSS is an equity-focused fund, it has the potential to deliver inflation-beating returns over the long term.
Encourages Long-Term Investing: The 3-year lock-in period ensures you stay invested, benefiting from market uptrends.
SIP Flexibility: You can start with as little as ₹500 per month via SIP.

Advantages of Investing in Mutual Funds

Variety of Investment Options: You can choose from equity, debt, hybrid, index, and sectoral mutual funds based on their risk profile.
No Lock-in Period: Most mutual funds offer high liquidity with no mandatory holding period.
Risk Diversification: Unlike ELSS, which is fully equity-oriented, other mutual funds offer diversification with debt and hybrid options.
Suitable for Short, Medium, and Long-Term Goals: Mutual funds cater to different time horizons.
Professional Fund Management: Fund managers make strategic decisions to maximise returns while managing risks.

Which is Better: ELSS or Mutual Funds?

Choosing between ELSS vs Mutual Funds depends on your financial goals and risk appetite.

Choose ELSS if:

You need tax-saving benefits under Section 80C.
You are comfortable with a 3-year lock-in.
You have a long-term investment horizon and want equity exposure.

Choose Mutual Funds if:

You need high liquidity and flexibility.
You want diversified options across equity, debt, and hybrid funds.
You are investing for short-term or medium-term goals.

For tax benefits, ELSS is a clear winner. For broader investment options, mutual funds are better.

Conclusion

Both ELSS and mutual funds serve different investment purposes. If your goal is tax savings and long-term wealth creation, ELSS is the better option. However, if you are looking for flexibility, diversified options, and liquidity, mutual funds are the way to go.

Before investing, assess your financial goals, risk appetite, and investment horizon to make an informed decision. If tax saving is not your priority, diversified mutual funds can offer more options tailored to your needs.

SIPs let you invest small amounts regularly, making it easier to stay consistent with your goals. With time, your money grows faster through compounding, helping you get the most out of your investments. Try our SIP Calculator to see how your money can grow and make smarter plans for your future

Can Mutual Fund Schemes Invest in Upcoming IPOs?

18 July 2025 | 7 mins read

Can Mutual Fund Schemes Invest in Upcoming IPOs? - H1 Initial Public Offerings (IPOs) have become a buzzword among investors looking for high-growth opportunities. Whether it’s a unicorn startup going public or a reputed company entering the equity market, IPOs attract substantial interest. But what about mutual funds — can they participate in IPOs? And if yes, how does it impact you as an investor in a mutual fund? This article explores the role of mutual funds that invest in IPOs, the process behind such investments, and how you can benefit from this strategy. You’ll also gain insights into how fund managers evaluate IPO opportunities and which mutual funds are more likely to invest in them. Role of Mutual Funds in Equity Markets - H2 Mutual funds play a vital role in India’s equity markets. Managed by professional fund managers, these pooled investment vehicles collect money from multiple investors and allocate it across a portfolio of stocks, bonds, or other assets based on the fund's mandate. In the context of equity investing, mutual funds: Provide diversification to small investors Help in price discovery and market depth Act as long-term institutional investors Reduce risk through strategic asset allocation Given their market presence and influence, mutual funds also participate in IPOs, often subscribing to large portions of new issuances. But this activity is more nuanced than simply bidding for shares. Are Mutual Funds Allowed to Invest in IPOs? - H2 Yes, mutual funds in India are allowed to invest in IPOs — both in the primary market (where shares are first issued) and in the secondary market (where stocks are traded after listing). This means mutual funds can apply for shares during an IPO’s book-building process just like retail investors, high-net-worth individuals (HNIs), and institutional investors. SEBI regulations allow fund managers to allocate a portion of the fund’s assets to IPOs, provided the investment aligns with the scheme's objectives and risk profile. For instance: A large-cap fund may only invest in IPOs of companies expected to be included in large-cap indices A multi-cap or flexi-cap fund has more flexibility to take exposure across market capitalisations, including IPOs An ELSS fund (Equity-Linked Savings Scheme) can also participate in IPOs if it aligns with its tax-saving and equity investment objective So, the short answer is: Yes, mutual funds can and do invest in IPOs — but not all funds, and not always. Why and When Do Mutual Funds Invest in IPOs? - H2 Investing in IPOs offers mutual fund managers several strategic advantages, including: 1. Access to Early Growth Potential - H3 Many IPOs are of young, fast-growing companies. By investing early, mutual funds aim to capture the growth upside before the stock gains mainstream popularity. 2. Price Arbitrage Opportunities - H3 If a mutual fund believes that the IPO is underpriced relative to its intrinsic value, it may invest with the intent of benefiting from listing gains or long-term appreciation. 3. Portfolio Enhancement - H3 Some IPOs bring fresh sector exposure or innovation to the market. Fund managers may invest to diversify or rebalance the portfolio with new-age businesses, like fintech or EV startups. 4. Long-Term Bets - H3 Fund managers often look at IPOs with a long-term lens. The goal isn’t always listing gains but building a position in a company expected to perform well over years. 5. Demand and Liquidity Trends - H3 In bullish markets, IPOs tend to be oversubscribed and see strong listing premiums. Mutual funds may participate to ride the market momentum, especially when investor confidence is high. Factors Fund Managers Consider Before Investing in IPOs - H2 While IPOs are exciting, they are also risky and speculative, especially for companies with no prior listing record. Fund managers conduct rigorous due diligence before deciding to allocate your money to an IPO. Here are the key factors considered: 1. Company Fundamentals - H3 This includes examining the company’s: Revenue and earnings trends Debt levels and capital structure Profit margins and business scalability Competitive advantage and market share 2. Valuation Metrics - H3 Fund managers analyse: Price-to-Earnings (P/E) ratio Price-to-Book (P/B) ratio Enterprise Value to EBITDA (EV/EBITDA) These are compared with listed peers in the same sector. 3. Promoter and Management Track Record - H3 A critical evaluation is made on the credibility, governance standards, and historical performance of the promoters and top management. 4. Utilisation of IPO Proceeds - H3 Fund managers study how the company plans to use the funds—whether for debt repayment, expansion, or general corporate purposes. 5. Macroeconomic and Sector Trends - H3 Sectoral outlooks, regulatory policies, and broader market sentiments also influence IPO investment decisions. 6. Anchor Book Participation - H3 Strong interest from anchor investors (like global funds or sovereign wealth funds) signals confidence in the issue, making it more attractive for mutual fund participation. Best IPO Mutual Funds: What to Look For - H2 If you're keen on gaining exposure to IPOs through mutual funds, it's important to choose the right type of fund. While there’s no official category called “IPO mutual funds,” some schemes actively participate in upcoming IPOs. Here’s what you should look for when selecting such a fund: 1. Fund Category and Investment Mandate - H3 Start by checking the category of the fund. Flexi-cap, multi-cap, and mid-cap funds generally have more leeway to invest in IPOs. These funds are not restricted to a single market capitalisation and often aim to capture high-growth opportunities, making them ideal for IPO exposure. 2. Track Record of Participating in IPOs - H3 Review the fund’s portfolio history. Some mutual funds consistently allocate a portion of their assets to new listings. You can find this information in the fund’s monthly factsheet or portfolio disclosure. Look for funds that have a pattern of investing in IPOs over time—not just as a one-off move. 3. Fund Manager's Experience and Strategy - H3 A skilled fund manager makes a significant difference. The manager's ability to evaluate IPO valuations, industry potential, and company fundamentals is crucial. Look for funds managed by professionals with a proven track record in equity investing and a sound IPO selection approach. 4. Diversification and Risk Management - H3 An ideal fund won’t rely heavily on IPOs alone. Instead, it will use IPO investments as part of a broader equity strategy. Ensure that the fund holds a well-diversified portfolio alongside its IPO allocations to reduce volatility and balance risk. 5. Consistent Performance Over Market Cycles - H3 While past performance isn’t a guarantee of future returns, funds that have consistently performed well across different market cycles often reflect strong management and strategy. Look at long-term performance metrics like 3-year or 5-year returns instead of just recent gains. 6. Transparency and Reporting - H3 Good IPO-investing funds are transparent about their holdings. Choose funds that provide detailed disclosures about their portfolio, including new IPO allocations, so you can track how your money is being deployed. Also, read the scheme information document (SID) to understand the fund’s mandate and whether it allows active IPO participation. Should You Invest in a Mutual Fund That Invests in IPOs? - H2 Pros: Access to IPOs without applying individually Professional due diligence and analysis Built-in diversification Potential to capture high-growth opportunities Cons: IPO investments may not always succeed May increase portfolio volatility Returns can be affected by market timing and sentiment If you're a long-term investor, funds that occasionally invest in IPOs can be a good addition to your portfolio — but don’t chase IPO exposure alone. Always assess the fund holistically. Conclusion - H2 Yes, mutual fund schemes in India can and do invest in IPOs, but they do so strategically — not emotionally or impulsively. Fund managers assess multiple factors before deciding to put your money in newly-listed companies. As a retail investor, you benefit from their expertise and risk management process without having to analyse IPOs on your own. If you're looking for exposure to IPOs but want to avoid direct stock-picking, investing in a mutual fund that invest in IPO offers a smart, diversified route. However, always match the fund’s strategy with your risk tolerance, time horizon, and financial goals.

Mistakes People Make While Investing and How to Fix Them

10 July 2025 | 7 mins read

Investing can be one of the most effective ways to build wealth over time. Whether you’re investing in mutual funds or stocks, the goal is simple: earning returns that beat inflation and help you achieve financial freedom. However, investing isn’t just about selecting the right stocks or funds — it’s also about avoiding costly mistakes that can slow your progress down.

How Can ELSS Funds Be Redeemed? Rules for ELSS Withdrawal

26 June 2025 | 9 mins read

Equity-linked Savings Schemes (ELSS) are a type of mutual fund in India that provide tax relief under Section 80C of the Income Tax Act. ELSS have a three-year lock-in period, during which the amount invested cannot be withdrawn. It is important for investors to know the ELSS redemption process, rules, and tax implications while making their financial plans. This article explores the intricacies of ELSS mutual fund redemption, shedding light on the procedures and considerations.

View All

FAQ

What is the main difference between ELSS and mutual funds?

ELSS is a tax-saving equity mutual fund with a 3-year lock-in period and tax benefits under Section 80C. Regular mutual funds do not offer tax benefits and come in various types, including equity, debt, and hybrid.

Is ELSS better than other mutual funds?

ELSS offers tax savings and high growth potential, making it ideal for long-term investors. However, it has a lock-in period, whereas other mutual funds provide more flexibility. The choice depends on your tax planning needs, investment horizon, and risk appetite.

How does the lock-in period affect ELSS investments?

ELSS has a mandatory 3-year lock-in period, meaning investors cannot withdraw before that. This encourages long-term wealth creation but limits liquidity. Regular mutual funds, especially open-ended ones, offer better liquidity, allowing withdrawals anytime.

Which has a higher return potential: ELSS or mutual funds?

ELSS primarily invests in equities, similar to equity mutual funds, offering high growth potential. However, returns depend on market conditions. Other mutual funds, like debt or hybrid funds, offer lower but more stable returns.

Can I invest in ELSS through SIPs?

Yes, you can invest in ELSS via Systematic Investment Plans (SIPs), but each SIP installment is locked in for three years from the date of investment. This means withdrawals will be staggered based on the SIP schedule.

Are ELSS funds riskier than other mutual funds?

Yes, ELSS is an equity-based mutual fund, making it riskier than debt or hybrid funds. However, its long-term investment horizon helps mitigate short-term market volatility and provides potential for wealth accumulation.

How are ELSS and mutual funds taxed?

ELSS investments qualify for tax deductions up to ₹1.5 lakh under Section 80C. Capital gains up to ₹1.25 lakh per year are tax-free, while gains above that attract 12.5% LTCG tax. Other mutual funds have different tax structures depending on the type of fund.

Can I redeem ELSS funds after 3 years?

Yes, after the 3-year lock-in period, you can redeem or stay invested. Many investors continue holding ELSS for long-term benefits, similar to regular equity mutual funds.

Which is better for short-term goals: ELSS or mutual funds?

For short-term goals, debt or hybrid mutual funds are better as they offer stability and liquidity. ELSS is designed for long-term tax-saving investments and is not ideal for short-term financial needs.

Should I invest in both ELSS and mutual funds?

Yes, diversifying your portfolio with both ELSS and other mutual funds balances tax savings, liquidity, and risk. While ELSS reduces taxable income, other mutual funds cater to different financial goals, offering flexibility in investment planning.