ELSS vs Fixed Deposit - What to Choose?

Bank Fixed Deposits (FDs) are a good investment option and every investor should have an FD in his/her investment portfolio. The biggest advantage that an FD has is that there is almost no element of risk involved and depositors are assured returns.

Let us take a look at some of the key features of bank FDs:

1. There are two types of FDs Tax saver FDs and regular FDs. Tax saver term deposits come with a lock-in period of up to 5 years, while for normal FDs the tenure ranges from 7 days to 10 years.

1. Regular FDs do not provide tax benefits and only tax saver FDs provide tax benefits
2. With a tax saver FD, depositors can claim a deduction of up to Rs.1.5 lakh under Section 80C of the Income Tax Act
3. Fixed deposits come with different interest payout options. This means that interest will be credited to the depositors account at regular intervals, be it monthly, quarterly or half-yearly
4. All senior citizens are eligible to get a higher rate of interest on term deposits
5. A loan/overdraft can be availed against a regular FD but not a tax saver FD
6. Regular FD holder can also use their deposits as a collateral an apply for a credit card
7. Premature withdrawal can be made in case of a regular FD but for tax saver FDs this facility is not available

Equity Linked Savings Schemes (ELSS)

Equity Linked Savings Schemes or ELSS are a type of investment option that falls under the equity mutual fund category. A Systematic Investment Plan (SIP), is a type of ELSS investment.

ELSS funds offer great tax benefits, and unlike FDs, the dividend earned on the investment will not be subject to tax deduction. Let us take a look at some of the key features of ELSS funds:

1. ELSS funds have a comparatively shorter lock in period of 3 years, while tax saver FDs come with a lock-in period of 5 years
2. ELSS has a high potential to give returns but at the same time there is an element of risk involved. If the equity fund does not perform well, the returns will be affected
3. ELSS investors can choose to go for a dividend payment ELSS fund. This will allow investors to get returns during the lock-in period just like in the case of term deposits
4. All ELSS fund schemes are eligible for tax exemption under Section 80C of the Income Tax Act in India
5. A tax deduction can be claimed for a maximum amount of Rs.1.5 lakh

Read more about -  Difference between SIP and FD

Comparison between ELSS and FDs

1. Security of investment - The main advantage that a fixed deposit has over an ELSS scheme is that it is a very secure investment and there is no need to worry about the safety of the money.
2. The returns on a term deposit is assured and does not depend of performance of the markets. This is not the case with ELSS funds because the rate of return is directly dependent on the performance of the equity stock.
3. Suitability -  While a bank FD is more suitable for a conservative investor and senior citizens, who do not have the luxury to take financial risks. On the other hand, ELSS schemes are more suited for those who have the capacity to take certain financial risks, want tax benefits and do want want to directly put their money in the equity market.

1. Loan/overdraft facility - One of the other benefits of an FD scheme is that it allows the deposit holder to avail a loan or an overdraft facility against their respective term deposit. This facility is not available on ELSS schemes.
2. Credit card facility - Those who hold an FD can also use their deposit as a collateral and apply for a credit card against the same. This facility is not available for those who choose to invest in ELSS schemes.
3. Returns - Though ELSS funds offer more lucrative returns, there is an element of risk involved. However, term deposits always offer guaranteed returns and there is almost no risk involved in this type of investment option.

Read more about -  Mutual Fund SIP Vs FD

Conclusion

A good and savvy investor will always spread out investments and have a mixed portfolio. A good financial portfolio should have both an ELSS scheme and a fixed deposit. Fixed deposits have always been a popular choice of investment in India and it is a good way to park your savings and earn a good return on the same. The rate of interest offered on FDs are higher than what is offered on savings accounts and hence it is a good option.

ELSS funds on the other hand come with certain risks. However, SIPs are a good option to put money in as it also inculcates the discipline of saving in a investor every month.

Both ELSS and term deposits offer good tax benefits and depending upon the investors risk acumen, a suitable decision can be made on what to choose.