What is ELSS Funds: A Beginner’s Guide

Investing in stocks requires extensive research to understand how the stock market functions. Mutual funds are an attractive way to invest in equity stocks without doing much research, but other MFs do not come with tax benefits. However, Equity Linked Savings Scheme (ELSS) funds could be a smart way of investing as they can help you save taxes and maximise wealth.

For conservative investors, there are many tax-saving schemes, including National Savings Certificates (NSCs), and Public Provident Funds (PPF). Still, those who are looking for higher returns and can afford higher risks can consider ELSS. This post will help you learn what ELSS funds are, how to invest in ELSS funds, tax saving mutual funds benefits, lock-in periods, and more.

What are ELSS Funds?

Equity Linked Savings Scheme (ELSS) funds are tax saving investments that invest at least 80% of their corpus into equity or equity-related instruments. These tax-saving schemes help you save up to 1.5 lakhs in taxes under the Income Tax Act’s Section 80C. These schemes come with a lock-in period of three years.

Why Choose ELSS Funds?

Investing in tax saving funds brings many benefits. Read on to know more about the tax benefits and other advantages of ELSS funds:

1. ELSS Scheme Tax Benefit

By investing in ELSS funds, you can lower your taxable income by Rs 1.5 lakhs and could get a tax benefit of up to Rs. 46,800 annually if you belong to the highest tax band. However, you need to pay LTCG (Long-term capital gains) tax of 12.5% if your profit exceeds Rs 1.25 lakh.

2. Short Lock-in Period

The lock-in period of ELSS is three years. Its maturity period is lower than that of other tax-saving investment options, such as PPFs and ULIPs, which have lock-in periods of 5 and 15 years, respectively. With a short lock-in period, you can redeem your money quickly when needed, which makes ELSS a fair investment option.

3. Diversification of Equities

ELSS funds use their corpus to invest in different asset classes. Additionally, they invest in a diversified range of companies in other sectors, varying from small to large cap. Diversification safeguards the money against market volatility, putting investors under minimum risk if a company or a sector does not perform well during the investing period.

4. Higher Profits

ELSS funds invest heavily in stocks, so they can earn great profits over time, outperforming other 80C instruments such as Fixed Deposits and Public Provident Funds (PPF). ELSS funds may provide annual returns of 10-12%, while traditional mutual fund tax-saving investment schemes may provide an average CAGR of 5-7%.

How to Pick The Best ELSS Mutual Fund?

Choosing the right ELSS fund to achieve your financial goals is important. Here are some factors to consider when choosing an ELSS fund.

1. Past Performance of the Scheme

While choosing an ELSS fund, investors should assess the scheme’s past record, including its expense ratio and other financial ratios. The ideal ELSS scheme performs well consistently with stable returns. Usually, an ELSS fund that has provided a 12-14% return can be considered good.

2. The Expertise of the Professional

Consider the expertise of the professional fund manager to understand how skilled the person is to handle equity portfolios.

3. Investment goals

To choose the best ELSS mutual fund, you must determine your investment goals, which means identifying what you want to do with your money and how much loss you can afford, while also considering the mutual fund tax benefit that ELSS funds offer.

4. Asset Allocation

The asset allocation pattern of a fund describes its diversification and risk level. To find the best ELSS funds, choose a diversified portfolio that invests across various categories and sectors.

How to Trade in ELSS Funds?

• Select a Financial Institution: Choose a trusted institution and complete the KYC process.
• Choose a Fund: Research ELSS funds based on past performance, portfolio, and financial goals.
• Select Investment Mode: Decide between a lump sum or a Systematic Investment Plan (SIP).
• Submit Application: Fill out the application form on the institution’s website or app.
• Invest: Purchase your chosen ELSS fund and ensure your bank account can handle regular SIP payments.
• Monitor Performance: Track your fund’s performance by regularly monitoring its NAV.

Best ELSS Mutual Funds

Below are some of the best ELSS mutual funds as of September 25, 2024:

1. Quant ELSS Tax Saver Fund

Quant ELSS Tax Saver Fund fund has delivered exceptional returns over 3 and 5 year horizons. With 26.09% and 37.87% annualized returns over respective periods, this equity fund aims for long term growth while offering tax savings under Section 80C. The minimum lumpsum investment is ₹1,000.

2. Bandhan ELSS Tax saver Fund

Earlier branded under IDFC Mutual Fund, this fund has generated sound 20.91% and 26.12% annualized returns over the last 3 and 5 years, respectively. It focuses on companies across market caps and sectors to create a well-diversified portfolio. You can invest a minimum of ₹1,000 in lumpsum.

3. SBI Long-Term Equity Fund

Offered by SBI Mutual Fund, this scheme has maintained consistency by providing 28.12% and 28.06% returns over the past 3 and 5 years. Following a multi-cap strategy with a focus on growth leaders, it makes a good tax-saving choice under the ELSS category. The minimum lumpsum investment is ₹1,000.

4. Parag Parikh ELSS Tax Saver Fund

With a distinguished track record and veteran fund management team, this PPFAS fund aims for long-term wealth creation by providing 21.13% and 26.48% returns over the past 3 and 5 years. The minimum lumpsum amount is ₹1000.

Conclusion

ELSS funds are an excellent option for investors seeking long-term capital gains and tax-saving mutual funds. Ensure you pick the right ELSS fund and follow your investment plan to reach your financial goals and safeguard your future finances.

FAQs

What are ELSS Funds?

ELSS funds, or Equity-Linked Savings Schemes, are mutual funds that invest primarily in equities or stocks. They offer tax benefits under Section 80C of the Income Tax Act, 1961, allowing investors to claim deductions of up to ₹1.5 lakh per financial year. ELSS funds have a lock-in period of three years, making them one of the shortest lock-in periods among tax-saving investments.

How do ELSS Funds work?

ELSS funds pool money from multiple investors and invest it in a diversified portfolio of stocks across different sectors and industries. The fund manager selects stocks based on their research and market trends to achieve the best possible returns. Since they are equity-oriented, ELSS funds are subject to market risks, and their performance depends on the stock market’s movements.

What is the lock-in period for ELSS Funds?

ELSS funds come with a mandatory lock-in period of three years, which means investors cannot redeem or sell their units before three years from the investment date. This lock-in period is one of the shortest among all tax-saving investments, such as Public Provident Fund (PPF) or National Savings Certificate (NSC), which have longer lock-in periods.

Can I invest in ELSS Funds through SIP?

Yes, you can invest in ELSS funds through a Systematic Investment Plan (SIP). A SIP allows you to invest a fixed amount in an ELSS fund at regular intervals, such as monthly. This approach helps in averaging the purchase cost of units and reduces the impact of market volatility.

References:
https://cleartax.in/s/elss
https://www.motilaloswalmf.com/investor-education/blog/a-complete-guide-on-elss-funds/
https://roots.hdfcsec.com/blogs/beginners-guide-to-elss-mutual-funds
https://www.indiainfoline.com/knowledge-center/elss-mutual-funds/a-beginners-guide-to-elss-mutual-funds

Author: All Content is verified by SMC Global Securities.