People look for different investment options to save taxes and earn decent returns in the process. There are various investments available for tax-saving and ELSS funds are one of them. What is ELSS funds? Well…
An Equity-Linked Savings Scheme or ELSS is a popular mutual fund that gives you the dual benefit of tax deductions under Section 80C and equity-based returns.
These funds primarily invest in equity and equity-related instruments to generate high returns for the long term. Let’s dive more into what is ELSS funds, its tax benefits, and how to invest in ELSS funds.
What are ELSS Funds?
An ELSS fund is a type of tax-saving mutual fund that invests in equity and equity-related instruments to generate lucrative long-term returns.
There is a 3-year lock-in period and a tax benefit of up to ₹1.5 lakh is available per annum.
A fund manager makes the buying and selling decisions on behalf of the AMC which gives you access to ELSS investing.
Along with tax savings and returns, you get the benefit of having professional assistance in managing your money through a fund manager.
Thus, ELSS funds are suitable if you want to diversify your portfolio, save taxes, and achieve long-term financial goals.
Here are some of the top features of ELSS funds:
- These funds invest at least 80% of their corpus in equity and equity-related instruments
- ELSS funds generate market-linked returns that can beat the inflation rate
- ELSS funds have the shortest lock-in period if compared with other tax-saving instruments like PPF or tax-saving FDs
- ELSS tax benefits and capital appreciation make these funds more attractive
- You can invest in ELSS funds for as low as Rs 500 if you choose a SIP route. There is no maximum limit to invest in these funds
How Does an ELSS Fund Work?
Every ELSS fund is a mutual fund and as a result, the way it works is similar to any equity fund. Here’s a detailed look at how an ELSS fund works:
1. Pools Money from Investors: The fund pools money from several investors. The total money managed by the fund is known as the AUM.
2. Invests in Equity: A fund manager directs the pooled money to stocks and decides how much to invest in which stock.
3. Your Investment is Locked for 3 Years: Your investment is locked in the fund for 3 years as you get two benefits in return. More on that in the next two points.
4. You Get to Save Tax: Investing ₹1.5 lakhs in ELSS funds allows you to deduct the same amount of money from your taxable income.
5. Returns are Market Linked: Equities are known to do well in the long run and ELSS funds that invest in them work on the same principle to deliver returns.
Types of ELSS Funds
If you want to invest in ELSS funds, here are the three categories:
1. Growth Option
If you choose the growth option, you will not earn dividends. You will just receive the gains at the time of redemption of your investment. These will increase the units of your investment which adds to your profits.
2. Dividend Option
Choosing the dividend option means you’ll get dividends paid regularly instead of at the time of the payout after the term. Dividends received using this option are tax-free, and you will receive the entire amount.
3. Dividend Reinvestment Option
In this option, you reinvest your dividends to increase your compounding returns. In a bullish market, this option provides better results.
Benefits of Investing in ELSS Funds
ELSS funds are known for their tax-saving benefits. As seen above, they offer tax benefits under Section 80C of the IT Act and you can get a tax deduction of ₹1.5 lakhs on your taxable income by investing in ELSS funds.
It comes with a lock-in, but there are two ways to look at this. One – uh oh, there’s a lock-in and my capital will be locked for three years. Two – yes, I get to lock in my capital for three years with the potential for substantial returns.
One more benefit of locking in your capital for three years is that you pay Long-Term Capital Gains (LTCG) tax on your returns, which are known to be lower than STCG. LTCG is typically 10%.
How to Invest in ELSS Funds?
To invest in ELSS funds, you need to be mutual fund KYC compliant. You can either invest through offline mode or online mode.
Online Mode
If you want to invest in an ELSS mutual fund online, you can follow these steps:
1. Download a Mutual Fund investing app
2. Complete your KYC
3. Select ELSS Funds
4. Choose a mode of payment
5. Complete the transaction
By the way, Dhan has this neat feature called ELSS Tracker that helps you track how much taxes you’re saving. Learn more in the following community post:
Now Live: Investing in Direct Mutual Funds on Dhan
Offline Mode
You can invest via a mutual fund distributor or directly through an AMC. A mutual fund distributor can assist you with the selection of mutual funds and the completion of the necessary forms. You can invest in the fund on your own by visiting a local AMC branch.
Why Should I Invest in ELSS Funds?
Here are some of the benefits of investing in ELSS funds.
- Tax Efficient with Higher Returns: ELSS funds are one the best options for you if you want to earn returns and save taxes.
- Managed by Professionals: Even if you are a conservative investor, ELSS can still suit your investment style as they are managed by experienced fund managers.
- Age Restriction: ELSS funds do not have any kind of age restriction.
- Diversification: If you want to diversify your portfolio and want the taste of equity returns, ELSS can be a good choice.
- Affordability: A SIP in ELSS funds can also help you to invest with as little as Rs. 500.
Top- Performing ELSS Funds
Here are some of the best ELSS mutual funds to invest in India.
| ELSS Fund Name | 3Y Return | Fund Size |
| Quant Tax Plan Direct-Growth | 34.59% | Rs. 4,924.99 Cr. |
| Bandhan Tax Advantage (ELSS) Direct Plan-Growth | 30.28% | Rs. 5,160 Cr. |
| SBI Long-Term Equity Fund Direct-Growth | 26.61% | Rs. 16,245 Cr. |
| Parag Parikh Tax Saver Fund Direct-Growth | 24.19% | Rs. 2,065 Cr. |
| Mirae Asset Tax Saver Fund Direct-Growth | 22.33% | Rs. 17,985 Cr. |
| Canara Robeco Equity Tax Saver Direct- Growth | 21.20% | Rs. 6,140 Cr. |
Conclusion
ELSS funds allow you to save tax and earn returns as per market conditions. In exchange, you are required to lock in your money for 3 years.
Thus, ELSS funds are used to achieve long-term financial goals while saving tax in each Financial Year.
Moreover, ELSS funds are one of the lowest lock-in tax-saving instruments available in India.
