Investing in ELSS: Is it better than Large Cap Funds?

23 Feb, 20233 mins read
Investing in ELSS: Is it better than Large Cap Funds?

When it comes to equity mutual fund investments, investors face a multitude of choices across various fund categories. Some of these options include large-cap funds, mid-cap funds, multi-cap funds, ELSS funds, and ETFs.

Equity mutual fund investors face a multitude of choices, including large-cap, mid-cap, multi-cap, ELSS, and ETFs. Large-cap funds offer stable growth, while ELSS funds provide tax benefits and outperform large-cap funds in terms of returns. Multi-cap funds provide well-diversified exposure, and investors should limit their fund selection to no more than four-five equity funds.

It can be difficult to know where to invest to achieve the highest returns while also achieving diversification and tax benefits. This article will provide insights on the comparison between large-cap/bluechip and ELSS funds.

Investment Options: Large Cap vs Mid Cap vs ELSS Funds

Large-cap funds tend to provide stable growth as they invest in companies that are industry leaders. They are less volatile in nature, making them a good choice for risk-averse investors looking for better returns than debt instruments.

Mid- and small-cap funds have higher return potential, but they are highly volatile in nature. During phases of a market downturn, their net asset value (NAV) tends to fall more than large-cap funds.

Historical returns between large-cap funds and ELSS funds in India can vary depending on the time period and market conditions. However, we can compare the average returns of these two types of funds over the past few years to get an idea of their performance.

Large-cap funds invest in companies with a large market capitalization and are considered to be less risky than mid-cap or small-cap funds. On the other hand, ELSS funds are equity mutual funds that provide tax benefits to investors under Section 80C of the Income Tax Act. These funds come with a lock-in period of three years.

ELSS vs Large Cap
ELSS vs Large Cap

Over the past 5 years, large-cap funds have delivered an average annual return of around 12-13%, while ELSS funds have given an average annual return of around 15-16%. This indicates that ELSS funds have outperformed large-cap funds in terms of returns. However, it's important to note that past performance is not a guarantee of future results and investors should always consider various factors before making investment decisions.

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Where to Invest: The Right Balance

If tax-saving along with wealth creation is your goal, investing in ELSS funds first is a good strategy. Once you make the required investment for tax saving, you can consider investing in other funds that suit your risk appetite and investment goals

However, if you have a higher risk appetite and want better returns than debt instruments in the long term, large-cap funds might be the perfect choice for you. Low-cost index funds that cater to the large-cap universe are also a good option, as they give you the exposure you need without worrying about fund manager selection, investing style drift, and other risks.

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Limit Your Fund Selection

Experts suggest that investors should not hold more than two or three ELSS funds, as having a presence in multiple fund categories purely because they exist does not lend to diversification.

All segments of equity funds belong to the same asset class – equity. When the market plunges, all will fall in tandem. Additionally, each fund invests in at least 50-60 companies spread across multiple sectors, offering enough diversification.

Furthermore, a large portfolio of funds is difficult to monitor, and chronic underperformers may escape scrutiny and be a drag on the portfolio.


Choosing the right mutual fund category is crucial for higher returns while also achieving diversification and tax benefits. Investors must select funds based on their goals and risk appetite. Investing in multi-cap funds and ELSS funds is an excellent strategy for most investors.

Large-cap funds are perfect for risk-averse investors who want better returns than debt instruments. Mid-cap funds are suitable for investors with a higher risk appetite. Investors should limit their fund selection to no more than four-five equity funds to achieve diversification while avoiding overlap in stock holdings and chronic underperformers.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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