ELSS Funds (Tax Saving Mutual Funds)

The best tax saving mutual funds give two options to the investors: Dividend Option or Growth Option. In the growth option, a lump sum is paid to the investor at the end of the lock-in period. And in the dividend option, a fixed amount is paid to the investor, every month, during the lock-in period.

Believe in the three-lettered magic word—SIP. Systematic Investment Plans are a monthly amount that goes into your investment. To save tax, you don’t need to burden yourself with arranging for a lump sum investment. You can start investing in the best tax-saving mutual funds right from the start of a financial year, in manageable amounts every month. The yearly cumulative amount will qualify for exemption under Section 80 C, in addition to giving you the benefit of rupee cost averaging. However, do understand that every SIP will have to be locked in for 3 years.

All tax saving mutual funds have their portfolio diversified into various equities, which make these a preferred option over fixed income instruments. Being linked to the markets, tax-saving mutual funds provide potentially higher returns, which fixes the erosion in long-term value due to inflation.

This is a key feature of tax-saving mutual funds. These funds have their portfolio invested in stocks across market caps, companies, and sectors. You can even diversify your portfolio across different fund houses.

Ideally, any tax savings investment comes with a long lock-in period. Tax saving ELSS mutual funds are the only investments that come with the lowest lock-in period of three years. This implies that you can enjoy liquidity while saving taxes. All other tax savings schemes have a lock-in period of above five years.

There is a limit of investment in other tax-saving options. For example, you cannot invest more than Rs.1,50,000/- in PPF. However, in ELSS, you can start from as low as Rs. 500/- and invest any amount as there is no cap on the upper limit.

Assess the fund returns to see if it has delivered consistently in the past. A comparative analysis of the best tax-saving mutual funds with its competitors will reveal if it has outperformed the benchmark set. Since equities are considered to be highly volatile, ELSS is suitable for investors with a high-risk appetite.

Past cannot be the predictor for the future, but it certainly is a reflection of the expertise at work. The fund houses managing the best tax-saving mutual funds will have an established track record of ensuring higher returns.

This includes expense ratio and exit load. Investment companies charge a fee called expense ratio which includes management fees (fees of fund manager) and operational costs. The lower the expense ratio and exit load, the higher the profit. The average expense ratio for a large cap fund is around 0.5-1.5%.