Explained: What Are ELSS Mutual Funds?

by Asha Ritu

When we invest our money, we look for investment opportunities which can help us generate wealth, get regular returns and/or save taxes. While there are numerous investment schemes available in the market, most of them offer returns which are taxed according to the Income Tax rules. This is where ELSS funds step in.

Let’s look at some commonly asked questions about ELSS investments.

What are ELSS Investments?

ELSS or Equity Linked Savings Schemes are Mutual fund investment schemes that help you save income tax. That’s why they are also known as tax-saving funds.

Other than deduction benefits and the lock-in period, an ELSS is quite the same as a diversified equity fund. It invests in equity shares of companies across sectors and market capitalisations. The Income Tax Act, under section 80C, allows taxpayers to invest up to Rs.1.5 lakh in specific securities and claim it as a deduction from their taxable income.

While there are numerous investment instruments available in the market, ELSS funds are considered the most popular, because of the following reasons:

  1. Lowest lock-in period - There are other tax-saving products available in the market like PPF, NPS or FDs and so on, however all these products have a lock in period of more than 5 years. ELSS is one such product which gives you tax benefit with just a minimum lock in of 3 years.
  2. Tax Benefits - ELSS funds provide tax benefits of upto Rs.1.5lakhs under section 80C.
  3. Higher Returns on Investments - With a longer investment option, you can allow your funds to grow and redeem the benefits after 3 years. Since ELSS funds invest the money in equities, the possibility of earning good returns are higher. Though other tax saving investment schemes — like the Provident Fund (PF), National Pension Scheme (NPS) and National Savings Certificates (NSC) — exist, an ELSS can offer the highest returns out of all.

How Can You Start Investing in ELSS Funds?

The best way to start planning your tax-saving investments is the start of the financial year. Most taxpayers procrastinate it till the last few months of the year and end up taking hurried decisions. Besides, if you start planning early, you can save your taxes as well as fulfill your long-term goals.

You can invest in ELSS the same way that you invest in any Mutual Fund. The easiest way is through an Online Investment Services Account. You can invest either as a lump sum or via the SIP (systematic investment plan) route. SIP ensures regularity and discipline and reduces the risk to capital. You can invest as little as INR 500 in an ELSS fund. While you can claim tax benefit only up to INR 1.5 lakh, you are free to invest as much as you like.

Selecting the right ELSS funds may not be an easy task. Some ELSS may have more exposure to large-caps, while some may be more exposed to mid-cap stocks, or multi-caps. So be sure to diversify and spread your investments across multiple funds and sectors to reduce risk.

When planning taxes, investing on a regular basis avoids the outflow of a large amount of money at the end of the financial year. So if you are looking to save taxes, generating higher returns along with a lower lock-in period, then you should consider investing in ELSS funds.

Happy investing!