Equity Linked Savings Scheme (ELSS) funds are a popular investment avenue for individuals seeking tax-saving options while also aiming for potential capital appreciation through equity investments. ELSS funds combine the benefits of tax savings under Section 80C of the Income Tax Act with the wealth-building potential of investing in the stock market.
What is ELSS?
ELSS funds are mutual funds that primarily invest in equity and equity-related instruments. They offer investors the opportunity to participate in the growth potential of the stock market while enjoying tax benefits. ELSS funds come with a lock-in period, which means that investors cannot redeem their investment for a specified period, typically three years. This lock-in period helps in promoting long-term wealth creation by discouraging premature withdrawals.
Features & Benefits of ELSS Funds
Tax Benefits
One of the key attractions of ELSS funds is their tax-saving feature. Investments in ELSS funds qualify for deduction under Section 80C of the Income Tax Act, allowing investors to claim a tax benefit of up to ₹1.5 lakhs in a financial year. Moreover, ELSS funds have the lowest lock-in period among all tax-saving instruments under Section 80C, making them a preferred choice for individuals looking to save taxes while also aiming for higher returns.
Potential for Higher Returns
ELSS funds predominantly invest in equities, which have historically delivered higher returns compared to traditional tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC). While equity investments carry inherent market risks, ELSS funds have the potential to generate superior long-term returns, especially when invested with a horizon of five years or more.
Flexibility and Diversification
ELSS funds offer investors the flexibility to invest through both lump-sum and systematic investment plan (SIP) modes. SIPs enable investors to invest small amounts regularly, thereby averaging their purchase cost and mitigating the impact of market volatility. Additionally, ELSS funds invest across various sectors and market capitalizations, providing investors with diversification benefits and reducing concentration risk.
Equity Exposure
Unlike traditional tax-saving instruments such as Public Provident Fund (PPF) and National Savings Certificate (NSC), ELSS funds predominantly invest in equities and equity-related instruments. This equity exposure provides investors with the potential for higher returns over the long term. ELSS funds offer an opportunity to participate in the growth potential of the stock market while enjoying tax benefits simultaneously.
Systematic Investment Plans (SIPs)
ELSS funds offer investors the flexibility to invest through Systematic Investment Plans (SIPs). SIPs allow investors to invest regularly in ELSS funds in a disciplined manner, thereby leveraging the power of rupee cost averaging. By investing a fixed amount at regular intervals, investors can mitigate the impact of market volatility and benefit from compounding over time.
Professional Fund Management
ELSS funds are managed by seasoned fund managers who possess the expertise and experience to navigate the dynamic equity markets effectively. These fund managers conduct in-depth research and analysis to identify promising investment opportunities, ensuring that the fund’s portfolio is well-diversified and aligned with the investment objectives.
Lock-in Period
One of the distinguishing features of ELSS funds is their lock-in period, which is shorter compared to other tax-saving instruments. ELSS funds come with a mandatory lock-in period of three years. This relatively shorter lock-in period provides investors with the flexibility to liquify their investments after the completion of three years, making ELSS funds a more liquid option compared to other tax-saving instruments like PPF and NSC.
Flexibility and Diversification
ELSS funds offer investors the flexibility to choose between diversified and sector-specific funds based on their risk appetite and investment goals. Diversified ELSS funds invest across various sectors and industries, providing broad exposure to the equity market. On the other hand, sector-specific ELSS funds focus on specific sectors or themes, offering investors the opportunity to capitalize on niche opportunities within the market.
Transparency and Regulation
ELSS funds operate under the regulatory framework laid down by the Securities and Exchange Board of India (SEBI). SEBI regulations ensure transparency and accountability in the functioning of ELSS funds, safeguarding the interests of investors. Additionally, ELSS funds are required to disclose their portfolio holdings regularly, enabling investors to make informed decisions.
Top Factors to Consider Before Redeeming Mutual Funds: A Comprehensive Guide
Factors to Consider While Investing in the ELSS
Investment Goals
Before investing in ELSS, it’s essential to define your investment goals. Whether you’re investing for wealth creation, tax-saving purposes, or a combination of both, aligning your investment objectives will help you choose the right ELSS scheme suited to your needs.
Risk Appetite
ELSS funds are equity-oriented, which implies they carry a certain level of risk associated with stock market fluctuations. Assessing your risk tolerance is crucial before opting for ELSS investments. Investors with a higher risk appetite may opt for ELSS funds with a higher allocation to equities, while those with a conservative approach may choose funds with a balanced portfolio.
Investment Horizon
The investment horizon plays a significant role in determining the suitability of ELSS investments. Since ELSS funds have a lock-in period of three years, investors should have a long-term investment horizon to ride out market volatility and potentially benefit from the power of compounding.
Fund Performance
Evaluating the past performance of ELSS funds is vital in selecting the right scheme. Analyze factors such as fund returns, consistency in performance, and fund manager’s track record to gauge the fund’s potential to deliver returns over the long term.
Expense Ratio
Expense ratio refers to the annual fee charged by mutual fund houses for managing the fund. Lower expense ratios imply higher returns for investors. Hence, it’s crucial to compare the expense ratios of different ELSS schemes before making investment decisions.
Tax Implications
While ELSS investments offer tax benefits on the invested amount, investors must also consider the tax implications on returns. Long-term capital gains (LTCG) exceeding ₹1 lakh from ELSS investments are subject to taxation at a rate of 10%. Understanding the tax implications can help investors plan their investments more efficiently.
SIP vs. Lumpsum
Systematic Investment Plan (SIP)
SIP involves investing a fixed amount at regular intervals in ELSS funds. SIPs offer benefits such as rupee cost averaging and disciplined investing, making them suitable for investors looking to mitigate market volatility and build wealth gradually over time.
Lumpsum Investment
Lumpsum investment involves investing a single amount in ELSS funds at once. While lumpsum investments have the potential to generate higher returns, they also carry higher risk due to market timing. Investors with a higher risk appetite and a longer investment horizon may consider lumpsum investments.
Best ELSS Funds 2024
| ELSS Mutual Fund | 3 Year |
| Quant ELSS Tax Saver Fund – Direct Plan – Growth | 35.58% |
| SBI Long Term Equity Fund – Direct Plan – Growth | 27.62% |
| Motilal Oswal ELSS Tax Saver Fund – Direct Plan – Growth | 24.24% |
| HDFC ELSS Tax saver – Direct Plan – Growth | 26.78% |
| DSP ELSS Tax Saver Fund – Direct Plan – Growth | 22.35% |
| Mirae Asset ELSS Tax Saver Fund – Direct Plan – Growth | 19.20% |
Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Note – Data as of 20th Feb, 2024.
Quant ELSS Tax Saver Fund Direct Growth
The Quant ELSS Tax Saver Fund Direct Growth Fund has shown annualized returns of 35.58% over the last three years and 34.98% over the last five years, falling under Quant Mutual Funds’ Equity category. The minimum investment amounts are INR 500 for lump sum and INR 500 for SIP in the Quant ELSS Tax Saver Fund.
SBI Long Term Equity Fund Direct Plan Growth
The performance of the SBI Long Term Equity Fund has been 27.62% annually over the past three years and 23.14% over the last five years, falling under the Equity category of SBI Mutual Funds. The minimum investment for lump sum and SIP is INR 500.
Motilal Oswal ELSS Tax Saver Fund Direct Growth
The performance of Motilal Oswal ELSS Tax Saver Fund has been impressive, with annualized returns of 24.24% in the past three years and 22.27% in the last 5 years. This fund belongs to the Equity category of Motilal Oswal Mutual Funds. The minimum investment amount is INR 500 for lump sum and SIP investments in this fund.
HDFC ELSS Tax Saver Direct Plan Growth
The performance of HDFC ELSS Tax Saver Fund has been 26.78% annually for 3 years and 19.96% for 5 years. It belongs to HDFC Mutual Funds’ Equity category. Minimum investment for lump sum and SIP is INR 500.
DSP ELSS Tax Saver Direct Plan Growth
The DSP ELSS Tax Saver Fund has delivered annualized returns of 22.35% over the past three and five years. It belongs to the Equity category of DSP Mutual Funds. The minimum investment required for this fund is INR 500 for lump sum and SIP investments.
How to Invest in ELSS Funds
Investing in ELSS funds is a straightforward process that can be done through various channels, including online platforms, mutual fund distributors, and directly through asset management companies (AMCs). Here’s a step-by-step guide to investing in ELSS funds:
- Research and Select a Fund: Begin by researching different ELSS funds based on factors such as performance track record, fund manager expertise, expense ratio, and investment philosophy. Evaluate the fund’s investment objective, portfolio composition, and risk profile to ensure alignment with your financial goals and risk tolerance.
- KYC Compliance: Complete the Know Your Customer (KYC) process by submitting the necessary documents, including identity proof, address proof, and PAN card, as mandated by regulatory authorities.
- Choose Investment Mode: Decide whether you want to invest through a lump sum or SIP mode based on your investment horizon, cash flow requirements, and risk appetite.
- Fill Application Form: Fill the application form provided by the chosen mutual fund house, ensuring accurate details and investment amount.
- Submit Documents and Investment: Attach the required documents along with the application form and submit them to the designated collection points, such as mutual fund offices, registered offices of AMCs, or authorized distributors.
- Monitor and Review: Regularly monitor the performance of your ELSS investments and review your portfolio to ensure alignment with your financial objectives. Consider rebalancing your portfolio if necessary based on changing market conditions or personal circumstances.
FAQs (Frequently Asked Questions)
1. Can I withdraw my investments from ELSS funds before the completion of the lock-in period?
No, you cannot withdraw your investments from ELSS funds before the completion of the three-year lock-in period.
2. How much to invest in ELSS?
There is no limit on the amount you can invest in ELSS. Tax benefits are capped at Rs 1,50,000 annually. Maximize your Section 80C limit by investing this amount before considering further investment in ELSS. If you’re not willing to lock-in your investment for three years, consider open-ended mutual funds instead.
3. What is the process to redeem ELSS before the completion of 3 years?
All ELSS mutual funds have a compulsory lock-in period of three years, during which you cannot withdraw your investment. There is no option to pay a penalty and redeem your units before the end of this period.
4. What separates ELSS from mutual funds?
ELSS, a type of mutual fund, provides tax deductions of up to Rs 1,50,000 annually under Section 80C of the Income Tax Act, 1961, unlike traditional mutual funds that do not offer tax benefits.
5. What is the process to obtain an ELSS statement?
To access your ELSS statement, you must log in to your investment account with the fund house using your login details. Look for the ‘view/download statement’ option after logging in. Choose the desired timeframe for viewing the statement and download it. If your ELSS investment was made through a third party, you can also retrieve your statement from their website. Additionally, you have the option to view or download your statement from the website of RTAs.
6. Which is superior: NPS or ELSS?
Both NPS and ELSS are popular tax-saving investments under Section 80C of the Income Tax Act. ELSS offers higher returns with a three-year lock-in period, while NPS requires investments to be locked in until retirement.
7. Which is more preferable, PPF or ELSS?
PPF and ELSS are common tax-saving investments under Section 80C of the Income Tax Act, 1961. ELSS is considered superior as it can provide returns between 12%-15%. In contrast, PPF has limited returns and cannot match ELSS. Additionally, PPF has a longer lock-in period of fifteen years compared to ELSS’s three-year lock-in period.
8. How can I obtain proof of my ELSS investment?
To obtain proof of your ELSS investment, simply log into your investment account with the fund house or access the portal of the third party through which you made the investment.
9. Are ELSS funds suitable for risk-averse investors?
ELSS funds have exposure to equities and are subject to market risks, so they may not be suitable for extremely risk-averse investors.
10. Can I invest in ELSS funds through SIP mode?
Yes, many ELSS funds offer the option of investing through SIPs, allowing investors to invest a fixed amount at regular intervals.
11. Are dividends from ELSS funds taxable?
Yes, dividends received from ELSS funds are taxable in the hands of the investors.
12. Can I invest in ELSS funds online?
Yes, most mutual fund providers offer online platforms where investors can easily invest in ELSS funds and manage their portfolios.
Conclusion
Equity Linked Savings Scheme (ELSS) funds offer investors a unique opportunity to save taxes while participating in the wealth creation potential of the stock market. With their tax-saving benefits, potential for higher returns, and flexibility of investment, ELSS funds are an attractive option for individuals seeking to build long-term wealth while minimizing their tax liability.
Investing in ELSS funds requires careful consideration of various factors, including fund performance, risk profile, and investment horizon. By following a disciplined investment approach and staying committed to their financial goals, investors can harness the power of ELSS funds to create wealth and achieve their long-term objectives.
