What are ELSS Funds (Tax Saving Funds) & How to Invest?

1. Lowest Lock-In Among Tax-Saving Investments

ELSS is an open-ended scheme that is characterized by a 3-year lock-in period. This implies that investors cannot redeem or sell their mutual fund units for 3 years. Moreover, redeeming their funds prematurely can attract an additional fee.

2. Diversified Investments

A key aspect of ELSS mutual funds is diversification. An ELSS builds its portfolio with investments in various stocks across different sectors and market capitalizations.

3. Tax Benefit

This type of equity mutual fund allows investors to claim tax deductions under Section 80C of the Income Tax Act, 1961.

4. Disciplined Investing

Equity market investments are prone to market volatility. Hence, after investing in equity mutual funds, one must be patient and keep a long-term investment horizon. As a result, he/she need not fret about the daily market fluctuations, which also inculcates disciplined investing.

5. Mandatory Lock-in Period Enables Growth

The compulsory 3-year lock-in period of ELSS mutual funds provides these investments with a growth opportunity, which is necessary for equity-oriented schemes.

6. Tax Benefits

When investing in this mutual fund, investors are eligible to claim a deduction of up to ₹1.5 lakhs per financial year under Section 80C of the Income Tax Act, 1961.

Furthermore, gains earned on the sale of ELSS investments are taxable in the following manner:

• Short-Term Capital Gains (STCG): This does not apply to ELSS mutual funds as investors cannot redeem their mutual fund units before a holding period of 3 years.
• Long-Term Capital Gains (LTCG): ELSS tax exemptions are applicable for up to ₹1 lakh per year in the case of long-term capital gains. LTCG of more than ₹1 lakh is taxed at a 10% rate plus surcharge and cess.

7. No Upper Limit

Most investors are unaware that ELSS has no upper limit. This implies that you may invest as much amount you want or as much as your risk appetite allows.

1. Tax Benefits of Equity Investing

ELSS funds are the only equity schemes extending tax benefits. Therefore, several investors consider these solely to enjoy ELSS tax benefits.

However, if tax saving is the only objective, investors can look to other investment options available under Section 80C. ELSS funds invest in equities, which involves risks. So, investors must ensure that they are financially capable of digesting losses if such a circumstance arises.

2. Mode of Investing

Investors can choose to invest regularly to meet their long-term goals instead of focusing only on the tax benefits of ELSS mutual funds. One can invest through a SIP to navigate the inherent market volatility and enable rupee cost averaging.

3. Past Performance of a Fund

It is of utmost importance that investors check a fund’s past performance before investing. That said, one must note that past performance is not an indicator of future returns. Instead, it only gives one a fundamental idea of probable returns.

4. Experience of the Fund Manager

Another critical point to evaluate before investing is the experience of a fund manager. It indicates how a fund manager generated returns by navigating the fund through market fluctuations over the years.

5. Risk Appetite

Like any other mutual fund, investment in ELSS involves risk. Therefore, potential investors must ascertain their risk appetite and the ability to digest losses, if any.

6. Investment Horizon

It is wise not to view mutual fund investments from a short-term perspective. Rather, one should keep his/her investment horizon longer and be patient to earn significant returns.