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ELSS Mutual Funds (Tax Saving Funds)

ELSS Mutual Funds (Tax Saving Funds)

Equity Linked Saving Scheme (ELSS) is a tax saver mutual fund that enables investors to save tax with the lowest lock-in period among tax-saving investments. You can invest in these funds to generate wealth and earn a stable income for your long-term financial goals.

Higher returns than other tax-saving options

Tax deductions up to Rs. 1,50,000 per year

Portfolio diversification

Lock-in period of 3 years

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List of Best ELSS Mutual Funds Based on Last 3-Year Returns

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What are ELSS Mutual Funds?

Equity Linked Saving Scheme (ELSS) is an open-ended equity-linked tax saving scheme that invests a minimum of 80% of the corpus in equity and equity-related instruments. It has a lock-in period of 3 years, the lowest among tax-saving options under Section 80C and offers tax benefits.

Investors investing up to Rs. 1,50,000 in a financial year are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. In addition to the tax benefits, these mutual funds offer good returns and liquidity, making them an ideal investment option for investors with long-term investment horizons.

Why Add ELSS Funds to Your Portfolio?

Shortest lock-in period of 3 years than other tax-saving options
Reduces risk by investing in different categories
Ideal for investors seeking tax-saving mutual funds
Offers returns as high as 25%-44% over 3 years time period.

Advantages of Investing in ELSS Funds

Investing in tax savers mutual funds like ELSS funds offers certain benefits. These advantages are as follows:

Tax Savings
Tax saving is one of the primary ELSS tax-saver mutual fund benefits. Investing in these funds up to Rs. 1,50,000 lakhs makes the investors eligible for tax deductions under Section 80C of the Income Tax Act, 1961. It is the only mutual fund scheme that enables investors to save tax while generating higher returns by investing in equities.
Lowest Lock-in Period than Other Tax Savers Funds
These funds have the lowest lock-in period of three years in comparison to a minimum of five years for other tax-saving funds. In addition, it is less than the public provident funds’ (PPF) lock-in period of 15 years. Hence, these funds offer better returns with the lowest lock-in period.
Higher Returns
Since ELSS mutual funds invest predominantly in equity and equity-related instruments, they generate greater returns from the market. In addition, it generates higher returns than PPF and other simple savings schemes.
Lower Tax on Gains
The ELSS mutual funds invest in equity instruments for three years minimum, making it a long-term investment. Hence, the gains are referred to as long-term capital gains (LTCG) and gains of Rs. 1,00,000 or more are taxed at 15%. Gains less than Rs. 1,00,000 per year are tax-free. However, the rate of taxation for short-term capital gains (STCG) is 15%.
No Maximum Investment Duration
If you invest in ELSS mutual funds and earn higher returns and stable income, you can continue the investment option without redeeming the gains. Redemption of gains is not compulsory after the expiry of the lock-in period of three years. It is the minimum investment duration for this mutual fund.
No Compulsory Redemption After 3 Years
There is no obligation for redemption after three years. Investors have the option to extend their investment in the ELSS fund if they are satisfied with the returns. The three-year period is just the minimum investment duration, with no set maximum investment duration.

Who Should Consider Investing in ELSS Funds?

The following categories of inventors can invest in the ELSS tax savers mutual funds:

Investors with Long Term Investment Horizon
Since ELSS mutual funds have a minimum investment period of three years, it is ideal for investors with a long-term investment horizon. In addition, you continue the investment to earn your expected returns even after the end of the lock-in period.
Investors Who Want to Save Tax
Investing in ELSS is an ideal option for investors who want to save tax by investing in equity instruments. It is the only three-year lock-in mutual fund that offers tax deductions for investment amounts up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.
First-Time Investors
If you are new to investing in mutual funds and want to enjoy the tax benefits, the ELSS mutual fund is a great option. It will enable you to earn higher returns in the long term and enjoy tax benefits.
Salaried Individual
If you are a salaried employee, a certain amount goes towards the Employment Provident Fund, a fixed income. However, if you want to balance risk and earn more return by investing, you must consider investing in ELSS. It also offers tax deductions for investments up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.
Long-term Investors Seeking Equity Exposure
ELSS funds have a three-year lock-in period, making them ideal for those with long-term investing goals. Investors wanting exposure to stock markets and ready to stay invested for a longer period of time might profit from ELSS funds, as equities have traditionally delivered higher long-term returns.
Risk-Tolerant Investors
ELSS funds are suitable for risk-tolerant investors due to their focus on stocks, which may be volatile. Individuals who are willing to take on some risk in their investing portfolio may be interested in ELSS funds. However, before contemplating ELSS funds, one must first determine one's risk tolerance and investing objectives.

Points to Consider Before Investing in ELSS Funds

Before investing in the best tax saver plan, you must consider these points to make your investments flourish:

Portfolio Composition
Since different ELSS mutual funds have different asset compositions and investing styles, you must look at the underlying theme. It will help you understand the strategies and approaches to building a portfolio. In addition, if you are a new investor, you must consider this point to compare the overall risk and the return of these funds.
Expense Ratio
Fund houses charge an expense ratio for maintaining your funds. The lower the expense ratio, the higher returns you will take home. Moreover, if the value of the fund increases, the expense ratio will also increase. Hence, you must choose an ELSS mutual fund with the lowest expense ratio, offering greater returns.
Lock-in Period
Since ELSS mutual funds have a lock-in period of three years, you cannot redeem the units before maturity. You can invest in these funds if you have a long-term investment horizon and stay invested until you earn the expected returns.
Fund’s Performance
Before choosing the ideal ELSS mutual fund, you must analyse its past performance. You must analyse various funds and compare their benchmark and history. It will help you choose the best tax saver scheme according to your investment goals.
Assessment of Risk
Before investing in ELSS funds, you should consider your risk tolerance. ELSS funds mostly invest in stocks, which may be volatile. Understanding your risk tolerance can assist you in selecting a fund that is appropriate for you, ensuring that you can remain invested for the necessary three-year lock-in period.
Expertise of Fund Managers
Consider the fund manager's experience and track record with the ELSS fund. The fund manager's investing philosophy and decision-making process have a substantial impact on the fund's success. Look at their previous experience, performance in managing similar funds, and general industry reputation.

Limitations of Investing in ELSS Funds

However, investing in ELSS mutual funds has certain limitations you must be aware of before investing in these funds to grow your capital. Here are the limitations of these funds:

Limited Tax Benefits
The tax benefits of the ELSS mutual funds are available only up to Rs. 1,50,000 per year under Section 80C of the Income Tax Act, 1961. If the investors invest more in the financial year, the tax benefits are limited to Rs. 1,50,000.
Market Risks
Since ELSS tax savers mutual funds invest in equity and equity-related instruments, they are subject to market fluctuations. However, if you want to earn the expected returns, you must have a long-term investment horizon.
Withdrawing Funds
Investors investing in ELSS mutual funds cannot redeem the gains before the maturity period, as these funds have a lock-in period of three years. Hence, investors must invest in these funds for a minimum of three years to redeem their units and earn higher returns.

How to Start Investing in ELSS Funds with INDmoney?

Investing in ELSS tax savers mutual funds is easy and hassle-free through INDmoney. You can follow these simple steps to start investing today:

Step 1
Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer).
Step 2
Once your Free investment account is ready, you can either search for ELSS Mutual Funds or go to the mutual fund section and tap on Tax Saver under the collection section.
Step 3
Choose a ELSS Mutual Fund by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.
Step 4
You can choose to set up SIP in ELSS Mutual Funds or even invest as lumpSum. Once you are on the individual ELSS Mutual Funds page click from the bottom “One-time” for lump sum investment or “SIP” for systematic investment plan.
Step 5
Choose the amount that you want to invest as SIP or LumpSum.
Step 6
Set up payments. If you choose to set up SIP in ELSS Mutual Funds, you can do a free automatic pay set up via bank mandate or UPI. If you choose to invest in lumpsum (one-time) then you can pay via UPI, netbanking, NEFT or RTGS.

Should You Invest in ELSS Funds?

ELSS, or tax-saving mutual funds, offer investors tax benefits if they invest up to Rs. 1,50,000 per financial year under Section 80C of the Income Tax Act, 1961. If you invest in these funds, you will generate returns and also avail tax benefits. However, these tax-saver funds have a three-year lock-in period, making them an option for investors with long-term investment horizons.

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Frequently Asked Questions

No, ELSS mutual funds are not risk-free as they invest 80% of the corpus in equity instruments. However, it offers tax benefits to the investors, which will lower their tax liability and save money.

Yes, you can withdraw the units invested in ELSS mutual funds after the maturity of the three-year lock-in period. In addition, you can continue the investment to earn your expected returns.

You can expect annualised returns as high as 44% by investing in the tax savers ELSS mutual funds.

Some of the best ELSS tax saving mutual funds are as follows: