ELSS Mutual Funds

An Equity Linked Savings Scheme (ELSS) is a mutual fund scheme primarily focused on investments in equity and equity-related securities. ELSS funds are strategically structured to enable investors to reduce their tax liabilities under Section 80C of the Income Tax Act in India. In this article, we will provide an extensive examination of ELSS mutual funds.

                                                                                                                                                        Subas Tiwari                                                                                                                                                                               In comparison to Fixed Deposits or the National Pension Scheme (NPS), Equity Linked Saving Scheme (ELSS) provides numerous tax-saving benefits while also delivering higher returns. Mutual funds, including ELSS, typically yield greater returns than FDs or NPS. Consequently, individuals who invest in ELSS funds or equities tend to regard ELSS as a more effective option.

Imagine the advantages of accumulating funds while also enjoying a substantial tax exemption. Tax exemptions essentially translate to savings, which can then be strategically allocated to other financial objectives. A similar program, known as Equity Linked Saving Scheme (ELSS), allows individuals to save up to Rs. 46,800 in taxes.

ELSS is an investment fund that offers optimal returns within a minimal lock-in period. It is predominantly composed of stocks from large and medium-sized companies. ELSS has been thoughtfully structured to simplify tax-saving for investors. Over an extended holding period, it presents significant potential for growth and enhanced returns. This fund boasts various appealing features; for instance, you can initiate investments with as little as Rs. 500, and it accommodates systematic investment plans (SIPs). The fund comes with a minimum lock-in period of 3 years, meaning you can easily exit the fund and access your funds after this period. The most noteworthy feature is that this fund empowers taxpayers to potentially save up to Rs. 46,800 in taxes.

Fund’s salient features

There is a specified range for the minimum deposit amount in this tax-saving fund. In this particular fund, you can commence your investment with as little as Rs 500, and the upper limit for your deposit is capped at Rs 1, 50,000. Your earnings from this fund are contingent on both your deposit amount and the prevailing market conditions. Considering the performance over the past year, it has been promising, with mutual funds, as well as equities, delivering favourable returns.

Multiple benefits with single investment

Indeed, an Equity Linked Saving Scheme (ELSS) is a tax-saving fund that predominantly allocates its funds to equity schemes. Equity funds are investment schemes that channel funds into the shares of various companies. The selection of companies for investment is typically based on their market capitalization, and the fund’s assets are distributed among these companies. If an individual consistently invests Rs 1.5 lakh in an ELSS every year, they can avail a tax saving benefit of up to Rs 46,800 under section 80C of the Income Tax Act. It’s important to note that while the tax benefit is capped at Rs 1.5 lakh, you are indeed allowed to invest more than this amount in ELSS if you choose to do so.

Why invest in ELSS?

ELSS is considered to be much better than those who follow the traditional methods of tax saving. Compared to Fixed Deposit or NPS, ELSS offers many tax saving facilities along with giving higher returns. Mutual funds earn more than FDs or NPS. Therefore, people who invest in ELSS funds or equities consider ELSS to be more effective. The biggest thing is that the lock-in period of ELSS is very less as compared to FD or NPS. That is, the possibility of high returns in a short time can be found in ELSS.

Who can invest?

ELSS can be invested by any person who wants to reduce his income tax under section 80C by investing money in tax saving scheme. It is an equity investment, so those who invest money for a long term and expect returns, who are less concerned about market risk, can make the most of this fund. Since ELSS has a lock-in period of 3 years, the fund is taxed on the basis of long-term gains. If earning more than Rs 1 lakh then interest of 10% will have to be paid.

More work with less investment

You don’t have to contribute a substantial amount of money all at once to participate in this fund. You needn’t worry about having to make a large initial deposit to benefit from this tax-saving program. You can join this scheme with a minimal investment. By averaging your contributions to this fund every year, you can start your investment journey with the same amount of money. You’re not required to make substantial payments per unit of the fund. If you prefer, you can begin your investment with as little as 500 rupees, and this approach also fosters a disciplined investment strategy.

What are ELSS funds?

ELSS is a mutual fund scheme & is quite similar to diversified equity fund of Mutual Fund. As the name suggests, the scheme primarily invests in equity market by buying equity stocks of companies listed on the stock exchanges. The units of the scheme are offered at the NAV (Net Asset Value). The NAV is announced for all business days and keeps changing primarily depending upon the movement in the prices of stocks held in the portfolio of the scheme in relation to market fluctuations. Mutual Fund ELSS is a good tax-saving instrument but still is not invested in large numbers by tax-savers. So, this article is just to wake them up & take notice of this tax-saving investing option so that there is maximum participation of the public from all walks of life.

What is the urgency to invest in ELSS?

It is most likely that the Direct Tax Code (DTC) proposed by the Government will come into effect (sooner than later), and your most dependable tax saving section – Section 80C of the Income Tax Act would undergo amendments. While the DTC includes a proposal to increase the eligible deduction under Section 80 C, Equity Linked Savings Schemes (ELSS) -also known as ‘tax saving mutual funds’, would no longer continue to be a part of eligible tax saving instruments, thus leaving you with fewer market-linked investment options to accelerate the process of wealth creation.

Who are advised to invest in ELSS?

YES. This is an important aspect of tax-planning especially when you look at ELSS as a tax-saving option. The following are the factors that could be considered.

Those who have clear & focused financial goals

If you have financial goals set in your life, the same too should influence the way you do your tax planning and invest in tax saving instruments. So, say for example your goal is retiring from work 5 years from now, then your tax saving investment portfolio should be less tilted towards market-linked tax saving instruments, as you are quite near to your goal and your regular income will cease. Likewise, if you are many years away from the financial goal, you should ideally allocate maximum to market-linked tax saving instruments and less towards those instruments (tax saving) which provide you assured returns.

Those who have risk appetite

It refers to your ability to take risk while investing, and it is totally dependent on your age, income, expenses, and nearness to your goal. So, if your willingness to take risk is high (aggressive), you can tilt your tax saving investment portfolio more towards the market-linked instruments such as ELSS. But if you have a moderate-risk profile, then you can take a mix of 60:40 into market-linked tax saving instruments and assured return tax saving instruments respectively.

Thus, now if you are young, income is higher, and therefore willingness to take risk is highest along with your financial goals being far away; you may look at ELSS mutual funds to avail a tax benefit under Section 80C. Please note that ELSS mutual funds are 100% diversified equity funds and a distinguishing feature about them is the compulsory lock-in period of 3 years brings in financial discipline towards holding one’s investments for the long-term. For investment in ELSS, there is a minimum investment amount of Rs. 500 which is unlike the other equity-oriented funds (which generally demand Rs. 5,000 as the minimum investment amount).

What should be the income bracket to enter investing?

It is said that if your income is high, your willingness to take risk is generally high. This can work in your favour, as you can allot your portfolio more towards equity-related instruments such as ELSS, and make your portfolio appear more aggressive. Similarly, if your income is not high enough, you can invest in other tax-saving instruments which provide you assured returns.

At what age should one begin investing?

Your age should determine your asset allocation. If you are young, you can take more risk and vice-versa. Hence, for prudent tax planning too, if you are young, you should allocate more towards market-linked tax saving instruments such as ELSS. Moreover, you would also enjoy the advantage of greater investment tenure which would enable you make more aggressive investments and create wealth over long-term to meet your financial goals. 

How to select ELSS funds?

Ideally while evaluating ELSS mutual funds, one should assess their performance over a 3-year time frame, as this would enable you to judge whether they have created wealth for your post- lock-in period.

Moreover, the fund has to ensure to its investors to fairly low-risk, but should provide risk-adjusted returns thereby making it a low risk-high return investment proposition in the category. Also, the returns should have been achieved by the Fund without indulging in much portfolio churning.

What are the benefits of ELSS MF?

Tax benefit on the Investment

You can get full tax benefit of investment under section 80 C of Income Tax Act. Maximum taxable limit is Rs. 150000 for the current Assessment Year.

Shortest lock-in period (period during which payment will not be made if you go in for tax benefit)

Lock-in period of ELSS is 3 years which is shortest in comparison to any other tax saving investment. This lock-in period is the only difference between diversified equity mutual funds & ELSS. When compared to Bank tax-saving FDs, ELSS scores over them as Bank FDs have a lock-in period of 5 years.

Tax-free returns

Any profit/ capital gain you have from ELSS is completely tax free. If you compare the returns from NSC & Tax-Shield Bank FDs, these are completely taxable & paid interest is added to your income for tax computation. So, you end up paying tax on interest received. Only PPF offers tax- free returns but it has a maturity period of 15 years.

Tax free dividends

ELSS schemes give dividends on regular intervals and the dividend you receive is tax free.

No entry loads

Say if you invest Rs. 15000 in ELSS Scheme, your Rs. 15000 is invested in ELSS Mutual Fund. You have to decide how much want to pay your financial advisor. Take a word of caution: some insurance agents sell ULIPS as Mutual Fund + Insurance with lots of ‘load’ expenses.

High growth

Equity funds can be volatile in the short run, but have been known to beat inflation and create wealth over the long run. If you are looking at investing some money that you won’t need in future, and are willing to stand atop the ups and downs of the market, you may find ELSS an ideal tax saving option.

Systematic Investment Plan (SIP) in ELSS

In SIP, you invest a certain amount each month in a fund. It’s an effective way of investing in ELSS as the concept of rupee cost-averaging and the power of compounding works well. Even if you have done your tax planning for this year, start from 1st AUGUST, 2015.

Comparison with Unit-Linked Insurance Plan

The investors & tax-saving public sometimes think of ELSS funds and ULIPs as alternatives. This is a mistake as functionally, there is nothing common between ELSS funds and ULIPs. It’s a basic rule of saving to not mix up insurance and investments. ELSS and ULIPs are two different products that serve different purposes.

ELSS is an equity fund in the market ULIP is a mix of life insurance and investment offered by life insurance companies
ELSS have a predictable cost, and easily understandable returns and are transparent about how the fund operates and what it invests in  From the premium paid, the insurer deducts charges towards life insurance (mortality charges), administration expenses and fund management fees. So only the balance amount is invested
Only payment of fund management charge (as expenses) per year is applicable ULIPs have high first year charges towards acquisition (including agents’ commissions)
The total investment under ELSS is in Equity Funds only In a ULIP, the mix of investment and insurance prevents savers from having a clear cost-vs-benefit understanding of either of the two components
In ELSS, there is no fixed period of maturity except for the lock-in period as the fund is open-ended With an ULIP, you have to block your money for long periods of time. So, you sacrifice on transparency and liquidity
ELSS has a 3 years lock-in period ULIPs have a 5 years lock-in
ELSS has no switching facility of funds as it is controlled by the fund manager


ULIPs provide for ‘switch’ from one fund to another


Where do ELSS stand as a preferred fund for investment?

ELSS stands out as a favored tax-saving choice for savvy investors. It not only offers diversification through its equity investments but also comes with a relatively short lock-in period of just 3 years from the date of investment. The returns generated from ELSS investments are closely tied to the performance of equity markets. Furthermore, the returns from ELSS schemes are tax-free.

In recent years, some of these funds have demonstrated exceptional growth, multiplying in value by three times within a 5-year period. It’s worth noting that there is no specific limit on the amount you can invest in ELSS funds. However, you can claim a tax deduction of up to Rs. 1,50,000 under Section 80C of the Income Tax Act.

It is always better to invest-

  • via SIP mode rather than lump-sum (for cost-averaging)
  • in GROWTH options (for wealth accumulation)
  • in DIRECT Plan (to save costs & higher returns)

ELSS vs. NPS vs. PPF

ELSS (Equity Linked Savings Scheme), NPS (National Pension System), and PPF (Public Provident Fund) are all popular tax-saving investment options in India. Each of these options has its own set of features, benefits, and limitations. Here’s a comparison of ELSS, NPS, and PPF to help you make an informed decision:

  1. Nature of Investment:

ELSS: ELSS is a mutual fund scheme primarily investing in equities. It aims for capital appreciation and carries market-related risks.

NPS: NPS is a retirement savings scheme that allows you to invest in various asset classes, including equities (up to 75% of the contribution in Tier I account). It is designed for building a retirement corpus.

PPF: PPF is a long-term fixed income investment scheme offered by the government. It offers a fixed interest rate and is considered a safe investment option.

  1. Lock-in Period:

ELSS: ELSS has a lock-in period of three years, which is the shortest among the three options.

NPS: NPS has a lock-in period until retirement (with some exceptions). Partial withdrawals are allowed under specific circumstances.

PPF: PPF has a lock-in period of 15 years, but it can be extended in blocks of five years indefinitely.

  1. Tax Benefits:

ELSS: Investments in ELSS are eligible for a tax deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year. However, returns from ELSS are subject to long-term capital gains tax.

NPS: Contributions to NPS enjoy tax benefits under Section 80CCD (1) and Section 80CCD (2) of the Income Tax Act. However, there are restrictions on withdrawals, and the maturity amount may be partially taxable.

PPF: PPF investments and interest earned are both eligible for tax deductions under Section 80C. Additionally, PPF returns are tax-free.

  1. Risks and Returns:

ELSS: ELSS investments carry market-related risks. Returns can be higher but are subject to market fluctuations.

NPS: NPS offers a mix of asset classes, including equities, which can provide potentially higher returns than PPF but with some risk.

PPF: PPF offers fixed, guaranteed returns. It is a low-risk investment but typically provides lower returns compared to ELSS and NPS.

  1. Flexibility:

ELSS: Offers flexibility in terms of investment amount and frequency (through SIPs). Post-lock-in, you can redeem or switch your investments.

NPS: Provides flexibility in asset allocation and contribution amount. It is designed for long-term retirement planning, so withdrawals are restricted.

PPF: Offers flexibility in terms of contribution amounts and frequency but has a long lock-in period.

  1. Purpose:

ELSS: Primarily used for wealth creation and tax-saving goals.

NPS: Designed for long-term retirement planning and building a retirement corpus.

PPF: Suited for long-term savings, particularly for conservative investors.

  1. Liquidity:

ELSS: Becomes liquid after the three-year lock-in period.

NPS: Generally, not liquid until retirement, with some exceptions.

PPF: Offers partial withdrawal options from the seventh year onwards.

The choice between ELSS, NPS, and PPF depends on your financial goals, risk tolerance, and investment horizon. Many individuals opt for a combination of these investment options to balance risk and returns while achieving their financial objectives. Consulting a financial advisor can help you create a tax-efficient and diversified investment portfolio based on your specific needs and circumstances.

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