ELSS mutual funds are among the most sought-after tax-saving investments in India. They provide a unique combination of tax savings, equity exposure, and the potential for good returns. This blog will explain what ELSS mutual funds are, the tax benefits they offer, and how you can start investing in them. Let’s get started!

What are ELSS Mutual Funds?

ELSS (Equity Linked Savings Scheme) is a type of mutual fund that invests primarily in stocks. These funds aim to offer long-term capital appreciation by investing in a diversified portfolio of equities. What makes ELSS unique is that it is a tax-saving mutual fund. Investments in ELSS are applicable for tax deductions as per the Income Tax Act’s Section 80C.

Features of ELSS Mutual Funds

Here are some important features that make ELSS mutual fund investment attractive:

Lock-in Period of 3 Years

ELSS mutual funds come with a minimum lock-in period of three years, which means you cannot withdraw your investment before this period ends. While this may seem like a restriction, it encourages long-term investing, giving your money time to grow.

Equity Exposure

ELSS funds invest at least 80% of their corpus in equities. These investments are spread across sectors and market capitalisations, including large-cap, mid-cap, and small-cap stocks.

Tax Benefits

One of the most significant benefits of ELSS investment is the tax benefit. Under Section 80C, you can claim up to ₹1.5 lakh deduction on your taxable income when you invest in ELSS mutual funds.

Market-Linked Returns

ELSS funds offer market-linked returns, meaning the performance of your investment depends on the performance of the underlying equities. While there is potential for high returns, the risk is also higher compared to traditional fixed-income investments.

Diversified Portfolio

ELSS mutual funds generally invest in diverse stocks across different industries. This reduces the concentration risk, providing a balanced portfolio that can withstand market volatility better than single-sector investments.

How Do ELSS Mutual Funds Work?

ELSS mutual funds work like any other equity mutual fund, with the added benefit of tax savings. The fund manager selects stocks based on thorough market analysis and research. These stocks may come from different industries and sectors, providing a well-diversified portfolio aimed at maximising returns.

Investing in an ELSS means buying units of the fund. The Net Asset Value (NAV) fluctuates depending on the market performance of the underlying stocks. Due to the lock-in requirement, the minimum investment period is three years, but staying invested longer can yield better results.

Tax Benefits of ELSS Mutual Funds

One of the standout features of ELSS mutual funds is the tax advantage they offer. Here are the tax benefits:

• As per the Income Tax Act’s Section 80C, ELSS mutual fund investments qualify for up to ₹1.5 lakh tax deduction per financial year.
• There are tax exemptions on the long-term capital gains through ELSS up to ₹1 lakh in a financial year.

How to Invest in ELSS Mutual Funds?

Investing in ELSS mutual funds is straightforward, and you can choose between two methods:

SIP (Systematic Investment Plan)

With SIP, you invest a fixed amount monthly, which is ideal for salaried individuals. An SIP calculator helps you estimate your investment’s future value and plan your SIP amount effectively.

Lump Sum Investment

With this method, you can invest a lot of money in one go. However, a lump sum investment carries the risk of market timing, which can impact returns if the market is at a high point when you invest.

Things to Consider Before Investing in ELSS

Keep the following points in mind before you begin investing in ELSS mutual funds:

Fund Performance

Check the historical performance of the ELSS fund and compare it with its peers. While past performance does not guarantee future results, consistent top-quartile performance is a good indicator.

Expense Ratio

The expense ratio shows how much of your investment is used to manage the fund. A lower expense ratio can yield higher returns.

Fund Manager Expertise

A skilled fund manager can pick quality stocks and build a strong portfolio that can withstand market volatility.

Investment Horizon

Although the lock-in period is three years, it’s advisable to stay invested longer, ideally for five to seven years.

Conclusion

ELSS mutual funds offer an excellent way to save taxes while investing in the equity market. Whether you invest via SIP or lump sum, remember to use an SIP calculator for better planning and stay invested long-term to maximise your gains. Invest wisely, start early, and let the power of compounding work in your favour.