Very often, investors face a dilemma when they plan to make investments that would help them fulfil their dreams and goals. Choosing to invest in a Mutual Fund can prove to be beneficial provided if you have a prerequisite idea about it. It often happens that terms like ELSS or other tax savings schemes raise a certain number of questions such as ELSS meaning, its benefits and major difference between ELSS and other tax-saving schemes.
ELSS meaning Equity-Linked Savings Scheme is a type of equity-diversified mutual fund. In ELSS, an individual needs to invest in equities of a company for a fixed tenure. This type of investment scheme is gaining popularity as it helps in faster wealth creation: also raising the question if it is worthy enough to invest in an ELSS scheme as compared to other tax savings schemes. Besides, one may also wonder if Equity linked savings scheme meaning still remains the same or it has widened the scope of investment for the investors?
So, before investing, take a look at four major differences between ELSS and other tax-saving schemes so that it helps you in proper decision making.
4 Major Difference between Equity-Linked Savings Scheme and Other Tax-Saving Scheme
Lock-in Period
The minimum lock-in period for any and all equity linked savings scheme is three years. The equity linked savings scheme doesn’t facilitate the investor with the option of pre-mature withdrawal. Unlike other investment options like NSC, PPF and EPF, ELSS offers a shorter lock-in tenure. Therefore, the meaning is not constrained within a particular limitation but can be considered as a better investment option if the investor has good financial stability.
However, in the case of other tax saving schemes, there is no lock-in period on investment. It means that you can withdraw your investment at any point of time when investing in other tax saving schemes. These offer the investor greater flexibility if he cannot afford to lock his investment for a longer period.
Flexibility on Shifting of Fund
It may be possible that other tax savings schemes that are offered at a lower cost may generate a similar return to that of ELSS in the longer run. However, equity linked savings scheme provides better flexibility when compared to other tax-saving schemes. Opting for ELSS will provide the investors with the option of shifting the savings from one fund to another. Moreover, during the process of shifting of funds, an individual is not required to commit to a multi-year deal.
However, this facility of the flexibility of shifting of the fund is not available in other tax savings schemes. This limitation keeps the ELSS one step ahead of other tax savings schemes even though it comes with the condition of the lock-in period.
Return on Investment
Given the fact that ELSS invests mainly in the equity instrument, the return is comparatively much higher than most of the other tax savings schemes. ELSS is not only constrained within higher return of investment but it also provides the investors with the option to saves on taxes. Moreover, the equity linked saving schemes is best for those investors who are interested in making long term investments.
The financial scenario is, however, not the same when you opt for other tax savings schemes. This is because of the fact that most other tax savings schemes are designed with a systematic investment plan. Moreover, the increase and decrease of the interest rate also influence the rupee cost factors that can have an impact on your returns.
Tax Benefits
Although in equity linked savings scheme there is no upper ceiling on investment, however, one is entitled to a tax savings scheme on investment above Rs.1,50,000. ELSS is generally preferred by those investors who are looking for tax benefits. Choosing to invest in equity linked savings scheme mutual fund can help you in getting a deduction on taxable income earned on your investment. The distinctive features and the tax benefits have made the ELSS more purposeful to the investors.
When it’s about opting for other tax savings scheme, the investors do not enjoy the same facility. This is because of the fact that in equity linked savings scheme, the risk on investment is comparatively high and is totally driven by equity shares. Whereas, most of the other tax savings scheme is designed in a systematic approach which is limited by its rules and market liabilities.
The Bottomline
Before investing, make a comparison between the equity linked saving schemes and other tax-saving schemes. Be it ELSS or other tax savings schemes, the benefit and limitations will depend upon the investment capacity of the individuals. You can also consider having a close look at the significant difference between the equity-linked savings scheme and other tax savings schemes as it will give you a better perspective in making your investment more productive.
