ELSS vs index mutual funds: Which one should investors choose and why?

If you are planning to focus on long-term wealth creation, there are several options to invest in equity mutual funds. However, two categories of mutual funds that are considerably popular among retail investors are equity-linked savings schemes (ELSS) and index mutual funds.

Index mutual funds are far more popular, with 345 schemes in total and assets under management (AUM) of ₹3.20 lakh crore, whereas the number of ELSS mutual funds stands at 42 in the entire mutual fund universe with total assets of ₹2.53 lakh crore, according to Association of Mutual Funds in India (AMFI) data.

Key difference

While all index mutual funds are passively managed, some ELSS funds are actively managed as well. Earlier (prior to May 2022), ELSS funds used to be actively managed only, but Sebi on 25 May 2025 allowed fund houses to launch passive ELSS funds as well.

What should investors choose?

Experts suggest that both investment options are suitable, as they provide long-term wealth creation through exposure to equity. However, one could be better than the other based on the investor's individual needs and preferences.

Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, opines that the choice between one and the other depends on the investor's emotional behaviour.

“Equity investments demand patience and a disciplined long-term approach, and both ELSS and index fund investments need this. The selection of the product depends on your emotional behaviour,” she says.

“Both ELSS and index funds are equity mutual funds which help to create long-term wealth. But ELSS can offer better compounding benefits for those who are impulsive in nature -- i.e., who get carried away by two human emotions namely fear and greed. It is generally advised to invest in equity funds for a long time horizon, spanning over a decade at least,” she adds.

While articulating similar views, Nilesh D Naik, Head of Investment Products, Share.Market, said, “Their suitability depends on your individual needs and preferences. ELSS funds may be suitable if you are under the Old Tax Regime and looking to avail tax benefits under Section 80C. Most ELSS funds are actively managed, with the goal of outperforming the benchmark index."

"Therefore, it is important to choose the right fund based on a proper assessment of the fund's performance consistency across market cycles, risk, and investment style or philosophy. In contrast, index funds are passive funds which simply aim to deliver returns in line with the benchmark index,” he added.

For all personal finance updates, visit here