ELSS Vs Fixed Deposit

ELSS Vs Fixed Deposit

The main difference between ELSS and Fixed Deposit is that ELSS (Equity-Linked Savings Scheme) is a tax-saving mutual fund with the potential for higher returns but with market risks, while Fixed Deposits offer guaranteed, fixed returns with safety but lower growth potential.

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What Is Fixed Deposit?

A Fixed Deposit (FD) is a financial instrument provided by banks, offering a higher interest rate than a regular savings account. It’s an investment where money is deposited for a fixed term, earning guaranteed interest. This makes FDs a popular choice for risk-averse investors.

Fixed Deposits are characterized by their stability and predictability. The interest rate remains constant throughout the term, unaffected by market fluctuations. Investors can choose the duration, which typically ranges from a few weeks to several years, aligning with their financial goals and liquidity needs.

One of the key advantages of FDs is the assurance of returns. They are ideal for those seeking a safe investment avenue without exposure to market risks. However, the interest earned is taxable, and the returns might not always keep up with inflation, potentially affecting the real value of the investment.

For example, if you invest ₹1,00,000 in a Fixed Deposit with an annual interest rate of 7% for 5 years, you’ll receive a guaranteed sum of ₹1,40,255 at the end of the term.

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ELSS Meaning

Equity-Linked Savings Schemes (ELSS) are tax-saving mutual funds that invest primarily in the stock market. These funds offer the dual benefit of potentially higher returns and tax deductions under Section 80C of the Income Tax Act. ELSS funds have a mandatory lock-in period of three years.

ELSS funds are ideal for investors looking to save on taxes while participating in equity markets. The mandatory lock-in period encourages long-term investment discipline, although it restricts liquidity. The returns, linked to market performance, can be higher than traditional tax-saving instruments but come with associated risks.

Investing in ELSS provides an opportunity to benefit from the growth potential of equities. These funds are managed by professional fund managers who allocate assets across various sectors and companies. The performance of ELSS funds largely depends on market conditions, making them suitable for investors with a moderate to high-risk appetite.

For example, if you invest ₹1,00,000 in an ELSS fund with an annual return of 12% for 3 years, your investment could grow to approximately ₹1,40,492, while also offering tax deductions under Section 80C.

Difference Between Elss And Fixed Deposit

The main difference between ELSS and Fixed Deposit is that ELSS, a market-linked investment, offers the potential for higher returns with tax benefits but comes with risks, while Fixed Deposits provide guaranteed, fixed returns with safety, albeit typically with lower returns and without tax-saving benefits.

FactorELSS (Equity-Linked Savings Scheme)Fixed Deposit
NatureEquity-based, market-linkedDebt instrument, non-market-linked
ReturnsPotentially higher, varies with the marketFixed, predetermined rate
RiskHigher, depends on market fluctuationsLow, as they are not affected by market
Tax BenefitsTax deductions under Section 80C; Long-term capital gains tax appliesInterest is taxable; No specific tax benefits
Lock-in Period3 yearsVaries, generally no lock-in, but premature withdrawal may incur penalties
SuitabilitySuitable for investors with higher risk appetite and long-term goalsPreferred by risk-averse investors seeking guaranteed returns

Advantages Of Fixed Deposit

The main advantages of Fixed Deposits include guaranteed returns, safety and stability, a wide range of tenure options, and ease of investment. They are ideal for risk-averse investors, providing a predictable income stream and helping in effective financial planning without exposure to market volatility.

  • Guaranteed Returns

Fixed Deposits offer fixed interest rates, ensuring guaranteed and predictable returns. This makes them a reliable investment choice for those who prefer stability over high-risk, high-reward investments.

  • Safety and Security

Being offered by banks and financial institutions, FDs are considered safe investments. The principal amount is secure, and the interest rate is unaffected by market fluctuations, providing a solid safety net for investors.

  • Flexible Tenure Options

FDs come with a variety of tenure choices, ranging from a few days to several years. This flexibility allows investors to align their investments with their financial goals and liquidity requirements.

  • Easy to Invest

Opening an FD is straightforward and can be done quickly with minimal documentation. Most banks offer the option to start FDs online, making the process convenient and accessible to all

  • Effective Financial Planning

FDs are an excellent tool for financial planning. They can be used to save for specific goals, like funding education or a wedding, due to their fixed returns and known maturity amounts.

  • Tax Benefits

Under certain conditions, FDs offer tax benefits. For instance, tax-saver FDs, with a lock-in period of 5 years, qualify for tax deductions under Section 80C of the Income Tax Act.

Advantages Of ELSS Funds

The main advantages of ELSS funds include the potential for higher returns due to equity market exposure, tax benefits under Section 80C, and a shorter lock-in period of three years compared to other tax-saving instruments, fostering long-term investment discipline with a moderate to high-risk profile.

  • Higher Return Potential

ELSS funds invest in equity markets, offering the possibility of higher returns compared to traditional tax-saving options. This equity exposure can significantly boost your portfolio, especially in a growing market, making it an attractive option for long-term wealth creation.

  • Tax Benefits

Investments in ELSS qualify for tax deductions under Section 80C of the Income Tax Act, with a limit of up to ₹1.5 lakh annually. This feature provides a dual benefit of saving on taxes while potentially growing your investment.

  • Short Lock-in Period

ELSS funds come with a three-year lock-in period, the shortest among tax-saving investments under Section 80C. This relatively short duration offers a balance between long-term investment and accessibility, making it suitable for medium-term financial planning.

  • Disciplined Long-Term Investment

The mandatory lock-in period in ELSS encourages a disciplined approach to long-term investing. This period helps investors ride out short-term market volatility, often leading to better returns as equities tend to perform well over the long term.

  • Professionally Managed

ELSS funds are managed by professional fund managers who allocate assets across various sectors and stocks. This expert management can optimize returns, especially beneficial for investors not well-versed in stock market intricacies.

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ELSS Vs Fixed Deposit  – Quick Summary

  • The main difference lies in ELSS offering potentially higher, market-linked returns with tax advantages but bearing risks, while Fixed Deposits assure safer, fixed returns, generally lower, without tax benefits.
  • A Fixed Deposit is a bank-provided investment offering higher interest than regular savings. It involves depositing money for a set term, earning guaranteed interest, and appealing to investors seeking stability and low risk.
  • ELSS funds are tax-saving mutual funds investing in stocks, offering higher return potential and tax deductions under Section 80C, with a three-year mandatory lock-in period, ideal for long-term, growth-oriented investors.
  • The main advantages of Fixed Deposits include guaranteed returns, safety, diverse tenure options, and ease of investment. Ideal for risk-averse investors, they offer predictable income, aiding in stable financial planning sans market risks.
  • The main advantages of ELSS funds include the potential for higher returns, tax benefits under Section 80C, and a shorter lock-in period of three years, fostering long-term investment discipline with moderate to high-risk profiles.

ELSS Vs Fixed Deposit – FAQs  

What Is the Difference Between ELSS And Fixed Deposit?

The main difference is that ELSS (Equity-Linked Savings Scheme) is a tax-saving mutual fund with potentially higher returns and a lock-in period, whereas Fixed Deposits offer stable, guaranteed returns with no market risks.

How ELSS Is Calculated?

ELSS returns are calculated using the compound annual growth rate (CAGR) method, reflecting the mutual fund’s performance over time based on its NAV fluctuations, influenced by market conditions and fund management.

What Is The Maximum Amount For FD?

The maximum amount for a Fixed Deposit varies by bank and customer profile, but generally, there is no upper limit, allowing substantial investments, subject to the bank’s terms and the investor’s financial capability.

What Is The Holding Period Of ELSS?

ELSS funds have a mandatory lock-in period of three years from the date of investment, the shortest among tax-saving options under Section 80C, after which investors can choose to redeem their investment.

How Much FD Is Tax-free?

Interest earned up to ₹40,000 on Fixed Deposits is tax-free for general citizens, and ₹50,000 for senior citizens, under Section 80 TTB of the Income Tax Act. Beyond this limit, interest is taxable.

What Is The Time Period Of FD?

Fixed Deposits offer flexible tenures ranging from 7 days to 10 years, allowing investors to choose based on their financial goals and liquidity needs, with varying interest rates for different durations.

Is ELSS Taxable After 3 Years?

After 3 years, gains from ELSS are taxable. Long-term capital gains over ₹1 lakh are taxed at 10% without indexation benefit. Dividends, if any, are subject to Tax Deducted at Source (TDS).

Is ELSS A Good Investment?

ELSS can be a good investment for those seeking tax benefits under Section 80C, coupled with the potential for higher returns through equity exposure, albeit with associated market risks and a 3-year lock-in period.

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