ELSS or FD: What to choose?

Gone are the days when investors bought products solely to avail their tax-saving benefits. Today, investors purchase investmentsfor high coverage and returns;and while tax-saving is an essential aspect of every investment, it should not overpower other features, such as liquidity, purpose, etc.

Equity-linked savings schemes (ELSS) and bank Fixed Deposits (FD) have gained immense popularity over the years, butsome still get confusedbetween them. So before you decide to invest in an ELSS mutual fund or an FD, let’s understand them in detail.

What areELSS funds?

As the name suggests, equity-linked savings schemes or ELSS are a type of mutual fund that primarily invest in equity and related instruments. As with all equity investments, the reward is inversely proportional to the risk; hence, ELSS funds are a great tool forwealth creation over the long term.

Additionally, ELSS funds are diversified mutual funds that are exempt under Section 80C of the Income Tax Act, 1961. When you invest in ELSS mutual funds, you are eligible to receive a tax exemption of up to Rs. 1.5 lac on your taxable income.

Although ELSS funds offer attractive tax benefits, you cannot claim a deduction on the earned dividend.

What arefixed deposits (FDs)?

Primarily, there are two types of FDs: tax-saving FDs and regular FDs. While tax-saver FDs have a lock-in period of 5 years, the tenure of regular FDs can vary. If you want to reduce your tax liability, you can invest in a tax-saver FD to be eligible for Section 80C deductions.

Investing in tax-saving FDs allows every individual or Hindu Undivided Family (HUF) to claim a deduction of up to Rs. 1.5 lacunder Section 80C. Besides these tax benefits, FDs are an excellent investment option for those looking for low-risk investments. However, you might not beable to withdraw tax-saver FDs prematurely.

Let’s look at the distinction between ELSS funds and FDs to understand them better:

Parameter ELSS FUNDS FIXED DEPOSITS
Purpose ELSS funds aim to aid investors create wealth over the long term Fixed depositsaim to offer investors with a secureinvestment avenue
Suitability It is an excellent option for people with high-risk tolerance who wish to benefit from the equity markets It is the perfect solution for risk-averse investors who prefer to stay away from market volatility
Lock-in period ELSS funds can be redeemed only after three years Tax-saver FDscan be redeemed only after five years
Credit facility No such credit facility is available under ELSS funds You can utilize your FD account as collateral while availing credit
Risk Since ELSS funds are directly linked to the market, they carryhigh risk FDs are a secure investment that carry low risk
Return ELSS funds benefit from the fluctuations in the equity markets and can earn moderate-high returns over the long term Returns on FDs are low andthe rate is predetermined
Online presence You can choose an online option to invest in ELSS funds, through SIP or lumpsum method Not every bank provides an online investment option

 

To sum up, the choice between ELSS mutual funds and FDs usually depends on your financial condition and risk tolerance. While ELSS mutual funds aid you in wealth creation, FDs protect your capital. Happy investing!