Difference Between ELSS And Equity Mutual Fund

Last Updated: 6 Aug 2024

It is quite natural to be confused between equity funds and ELSS funds. An ELSS fund is just an equity fund with a tax break. The portfolio of an ELSS fund will be approximately like any diversified equity large cap fund. It is just the lock-in of 3 years and the effective returns that are different in case of ELSS Funds.

Is it True That ELSS Fund is Just Like Any Equity Fund?

From a portfolio perspective, the answer is yes. While the ELSS is classified as a separate category of fund, it is effectively an equity fund for all practical purposes. The basic rule of an ELSS fund is that it should be predominantly invested in equities. The only difference is that there is a 3-year lock in for these funds. That means once you are invested in these funds then you cannot redeem them for a period of 3 years from the date of investment. For all practical purposes, the portfolio of an ELSS is exactly like a normal equity funds.

Do ELSS Funds Offer Any Benefit On Dividends And Capital Gains Tax?

No, there is no difference on dividend and capital gains tax between ELSS and regular equity funds. Let us look at dividends first. In the case of ELSS Funds and equity funds, if you opt for dividend option, then the dividend is fully taxable in the hands of the investor at the peak incremental rate applicable. What about short capital gains?

In the case of equity funds, short term capital gains arise if held for less than 1 year. In this case, the gains will be taxed at 15% plus cess and surcharge. Short term capital gains are not applicable to ELSS funs as they have a minimum lock in period of 3 years. Again in the case of long term returns, the tax treatment for equity funds and ELSS funds is the same. LTCG is taxed at 10% flat above Rs.1 lakh exemption on capital gains annually. There will be no indexation benefit.

The big difference lies in the applicability of Section 80C of the Income Tax Act on investment. ELSS also offers exemption under Section 80C of the Income Tax Act for the amount invested in ELSS during the year. Section 80C of the Income Tax Act offers exemption up to an outer limit of Rs.150,000 per year. Your tax benefit is equivalent to the applicable tax rate on the exempt amount. No such benefit exists for normal equity funds.

Can You Give me a List of Top Performing ELSS Funds In India?

The table below captures the top performing ELSS funds in terms of 3 year returns. We have considered 3 year returns since that is the lock-in period for ELSS funds.

Scheme Name	NAV Direct	Return 3 Year (%) Direct	Return 3 Year (%) Benchmark	Daily AUM (Cr.)
Quant Tax Plan	236.24	36.62	18.84
BOI AXA Tax Advantage Fund	113.89	29.67	19.02	544.48
Canara Robeco Equity Tax Saver Fund	124.81	25.09	19.02	3,026.65
Mirae Asset Tax Saver Fund	33.83	24.95	18.84	10,544.55
IDFC Tax Advantage (ELSS) Fund	106.39	22.87	19.02	3,497.32
Union Long Term Equity	44.28	22.51	19.02	459.95
DSP Tax Saver Fund	85.51	22.25	18.84	9,460.36
JM Tax Gain Fund	31.38	22.23	19.02	64.44
PGIM India Long Term Equity Fund	25.56	21.97	18.84	340.47
UTI Long Term Equity Fund	157.65	21.66	18.84	3,007.16
Kotak Tax Saver Fund	79.66	21.36	18.84	2,371.10
Invesco India Tax Plan Fund	94.94	21.12	19.02	1,912.28
Axis Long Term Equity Fund	80.31	20.53	18.84	32,914.86
Baroda ELSS 96 Fund	51.99	20.47	19.02	211.70
Mahindra Manulife ELSS	20.65	20.19	18.84	424.12
BNP Paribas Long Term Equity Fund	64.23	19.76	18.84	536.20
Tata India Tax Savings Fund	150.84	19.63	18.37	2,910.92
Edelweiss Tax Savings	79.21	19.31	18.84	200.81
ICICI Prudential Tax Saving)	640.28	18.75	18.84	9,764.62
Motilal Oswal Long Term Equity Fund	29.19	18.66	18.84	2,318.64
HSBC Tax Saver Equity Fund	61.15	18.47	18.61	198.67
SBI Long Term Equity Fund	233.95	18.00	19.02	10,859.86
Principal Tax Savings Fund	339.11	17.62	18.84	925.56
Franklin India Tax shield Fund	930.10	17.29	18.84	4,965.54
Navi Long Term Advantage Fund	22.97	16.66	17.68	64.34
LIC MF Tax Plan Fund	109.02	16.53	18.84	403.48
L&T Tax Advantage Fund	85.76	16.10	19.02	3,541.07
Sundaram Diversified Equity Fund	152.53	15.70	18.84	2,057.03
Indiabulls Tax Savings Fund	14.17	14.65	19.02	47.79
HDFC TaxSaver Fund	774.05	14.36	18.84	9,208.66
IDBI Equity Advantage Fund	41.98	14.21	18.84	518.47
Taurus Tax Shield Fund	117.06	14.18	19.02	64.43
Nippon India Tax Saver (ELSS) Fund	80.97	12.22	18.84	11,943.12
Quantum Tax Saving Fund	75.15	11.93	19.02	99.86
Aditya Birla Sun Life Tax Relief 96 Fund	44.9	11.4	18.84	14,301.10

Data Source: AMFI

As you can see, ELSS funds have done fairly well in the last 3 years on compounded basis with returns ranging from 36.6% CAGR to 11.4% CAGR over a 3 year period. The ELSS funds manage a combined AUM of over Rs.78,000 crore.

Can You Explain How Tax Exemption Enhances ELSS Yields?

To understand the tax implication of the ELSS Funds, let us compare two investors who invest same amount of money in an equity fund and ELSS fund respectively.

Investor A (Equity Fund)	Amount	Investor B ( ELSS Fund)	Amount
Investment amount	100,000	Investment amount	100,000
Value at the end of 3 years	175,000	Value at the end of 3 years	175,000
Profit in INR	75,000	Profit in INR	75,000
Total Returns over 3 years	75%	Total Returns over 3 years	75%
CAGR Returns	20.60%	CAGR Returns	20.60%
Effective Returns after considering Section 80C benefits
Exemption u/s 80C	–	Exemption u/s 80C	30,000
Effective Investment in T1	100,000	Effective Investment in T1	70,000
Effective CAGR Returns	20.60%	Effective CAGR Returns	35.80%
Note: For simplicity, we have ignored the impact of surcharge and cess on tax

How did this big difference come? How did the same fund with tax benefit give nearly 75% higher returns? In reality, the tax exemption reduces your effective investment in the year you put money in ELSS. Therefore, that tends to magnify your return on investment. That is the power of an ELSS as the effective yields are after considering the tax shields.

In a way, you can say that ELSS combines the best of equity returns and tax savings giving a powerful post-tax performance.

Like Equity Funds, can we do SIP On ELSS Funds also?

Absolutely you can. Systematic Investment Planning (SIPs) can be done on ELSS funds just like you do in any equity fund. If you are planning to invest Rs.120,000 in ELSS during the fiscal year, then start an ELSS SIP of Rs.10,000 each month. That way you achieve the target for the full year and also get the benefit of rupee cost averaging. Also, your tax planning exercise more systematic rather than trying to hunt for liquidity in the last few months.

How will the lock-in of 3 years work in case of ELSS SIPs? The 3-year lock-in for each SIP instalment in the SIP will commence from the month it is invested in. You need to factor that in when you are planning your redemptions. That is where ELSS scores. You get fabulous returns and also tax breaks. That is surely a good way to create wealth, even as your saving your tax outflow.