ELSS Funds Versus Regular Mutual Funds

“Hi asav,
  what is the difference between tax saving funds and others , if we can save tax with tax saving funds , why cant every body invest in that, why other funds are needed?.
Thanks”

Tax Saving Funds are also known as ELSS – Equity Linked Savings Schemes. These are the Best Tax Saving Options because they are Equity liked. The main difference between ELSS & other routine mutual funds is that, there is a lock-in period of 3 years in ELSS while there is no lock-in period of 3 years in regular mutual funds.

Now, the question comes is that, if you can save tax with tax saving funds than why don’t we invest all of our money in tax saving funds? Well, because tax saving financial products come under the law of 80C. Any Financial products having under Section 80C can give you tax deductions in your gross total Income. But wait. There is a Limit for this.

Under Section 80C, You can have a tax benefit of up to Maximum Rs.1 Lakh. Now there are many Financial products having 80C Benefits such as your Life Insurance Premium, Mediclaim Premium, PPF, National Savings Certificate…etc…. You can have a tax benefits of maximum up to Rs. 1 Lakh in all of the above things.

Now, Life Insurance & Mediclaim Premiums and PPF (Public Provident Fund) Savings are the MUST expenses that every Indian do. The Maximum Limit of PPF is Rs.70,000 per year. So after investing in Life Insurance, Mediclaim & PPF, the Maximum limit of Rs.1 Lakh is exhausted almost fully and very little remains later on for investing in ELSS.

Now, you will ask that, why can’t we invest all the money in ELSS irrespective of tax benefits because after all they are mutual funds only.

Well, Here the logic is different. ELSS mutual funds don’t come in much varieties. Most of the ELSS Mutual funds come are Large Cap oriented ELSS Funds (Few are Midcap oriented). While Regular mutual funds come in lots of varieties. So you can add different flavours in your over all portfolio with other funds. Say for Example, Technology, Energy & Banking Funds are sector/Thematic Funds. You can’t have tax saving funds in this category.

Another advantage of investing in ELSS is, some intelligent investors argue that, we invest in PPF for Minimum of 6 years of Lock-in period and maximum of 15 years. Now if we are lock-in our money for such a long time horizon than why to go for Fixed return giving PPF? Why not to go for Equity (ELSS)? Because over such a long time horizon, the risk from Equity is almost NIL and the returns are Excellent.

In short, ELSS are the Best Financial Products but under Section 80C, You can save a Maximum of Rs.1 Lakh of Tax only and this clause limits the wide spread extensive use of ELSS. And on the top of this, people in India rush for ELSS at the end of year (March Ending) to save Tax. People don’t invest in ELSS for its Equity advantage but people invest in ELSS for purely tax benefits because the Financial IQ in people of India is still very low…..!!!!!

Anyway…I Hope this Information might be helpful to you….!!!!