What Are ELSS Funds & How To Invest In India?

Nov 21st 2023
Mutual Fund
What Are ELSS Funds & How To Invest In India?

What Are ELSS Funds? ELSS stands for Equity Linked Savings Scheme. Put simply, the funds covered in this type of scheme are equity funds that invest the money in equity and equity-associated investment tools. The most interesting thing about ELSS funds is that tax benefits offered to the investors. They can choose to save taxes according to section 80C of the Income Tax act.

What Are ELSS Funds?

ELSS funds are considered multi-faceted equity fund. These funds invest primarily in a set portion of registered business stocks in accordance with their investment objectives. When it comes to shortlisting the firms, market capitalization of the companies and industrial sectors are taken into account. What Are ELSS Funds? These funds aim to optimize asset appreciation over the long term. The fund management chooses shares following careful market research in order to generate the optimum risk-adjusted portfolio returns. Learn about tax-saving techniques so you can save more on taxes.

Characteristics Of ELSS Funds                                                                                                        

  • At least 80% of the overall invested amount is put in equity and equity-related tools
  • A diversified approach is adopted for investment in equity funds. This may vary according to market capitalization, industrial sector, and theme.
  • No maximum cap on investment tenure with 3 year lock-in period.
  • A Section 80C of the Income Tax Act tax exemption on the amount invested.
  • Income is considered as LTCG and subject to general tax laws.

Tax Benefits Of ELSS Funds

When it comes to adopting the most effective strategies for tax planning, Equity Linked Savings Schemes (ELSS) are the best way forward. Since the rewards depend on stock market performance, these funds may be able to produce better returns than other tax-saving products. The majority of ELSS funds' corpus is generally invested in equities. Under Section 80C of the Income Tax Act of 1961, you are eligible for an income rebate for ELSS of up to Rs. 1.5 lakh in a fiscal year. This can help investors to make a tax savings of Rs. 46,800 if they belong to highest income category.

Want To Calculate Equity Linked Saving Scheme With ELSS Calculator 

Reasons To Invest In ELSS Funds

  • Investors can choose to claim a tax deduction of up to Rs. 1,50,000 and reduce their tax burden according to Section 80C of the IT Act.
  • ELSS investments come with the shortest lock-in period of any 80C investments with just 3 years.
  • If the investor belongs to the highest tax bracket and fully exploits Section 80C benefits, investing in ELSS Mutual Funds can help him or her save up to Rs. 46,800 annually.
  • Gains are eligible for Long Term Capital Gains, which remain tax-free up to Rs. 1 lakh and only 1% beyond that.

Read - Best Debt Mutual Funds to Invest In 2023

Advantages Of ELSS Funds?

Apart from the tax saving, there are lots of other reasons that make ELSS funds a safe bet for today’s investors. Let’s get to know them below.

  • Diversification – A majority of ELSS funds tend to put the invested money across different organizations varying from small-cap to large-cap and different sectors. This way, investors can leverage the benefits of diversifying their investment portfolio.
  • Low Minimum Amount – These mutual fund enable investors to invest with an amount as low as Rs.500. This guarantees that they start investing without first preparing a handsome lumpsum amount.
  • SIPs – Although you may invest a lump sum in an ELSS scheme, most investors prefer the SIP approach since it enables them to contribute small sums and takes advantage of tax advantages while also giving them the chance to build wealth.
  • One can invest any amount, but Section 80C of the IT Act limits the tax benefits you can receive. Additionally, you have the option to continue investing for as long as you choose following the required 3 year lock-in term.

Factors To Consider While Investing In ELSS Funds?

If you are looking for the best ELSS funds to invest in India, it is necessary for you to keep in mind a number of factors that would help you get the best out of it.

Investment Along With Tax Saving

A large number of investors choose to invest in ELSS funds to save taxes as these funds are the only form of mutual fund that allows investors to invest in the stock market while embracing tax benefits. There are different types of tax benefits according to Section 80C of the Income Tax Act. However, before you invest in ELSS, you should ensure that you are backed by a steadfast investment strategy to increase your likelihood of reaching your financial objectives. Tax preparation is usually a part of the same and most investors make the smart use of ELSS funds to reach their long-term objectives.

SIP or Lumpsum

Most investors primarily resort to ELSS funds in order to leverage tax benefits. Due to which, they make a single, large investment in the market. This is due to the fact they don’t have time to save taxes and they have no other option except to invest the entire amount in one go. This may be dangerous, especially if they choose to invest while the market is going up. Kicking off a systematic investment plan (SIP) can help investors average their purchasing cost per unit because ELSS investments are typically associated with long-term financial goals.

Suggested Investment Horizon

Due to the lock-in period of three years, ELSS funds are preferred by many young investors in comparison to conventional options like PPF or NSC. Considering the point that stock investments usually stabilize over a period of 5-7 years, this approach may not be lasting. Short-term investment horizons with ELSS funds are not great due to their inherent volatility.

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Top ELSS Mutual Funds in 2023

Fund Name

3-Year Return (%)

5-Year Return (%)

Quant Tax Plan Direct-Growth

36.68%

24.72%

Mirae Asset Tax Saver Fund Direct-Growth

24.67%

16.48%

Bandhan Tax Advantage (ELSS) Direct Plan-Growth

31.58%

16.34%

Bank of India Tax Advantage Direct-Growth

25.84%

15.99%

Kotak Tax Saver Fund Direct-Growth

25.42%

15.72%

FAQs

1. Should I Invest In ELSS Funds?

Over other traditional tax-saving tools like FDs, NPS, etc., ELSS offers several advantages. In comparison to other tax-saving plans, it has the shortest lock-in time and offers larger returns.

2. Is There Any Lock-In Period In ELSS Funds?

ELSS Mutual Funds come with a lock-in period of 3 years.

3. How Can I Invest In ELSS Funds?

You can invest in ELSS funds just like you invest in other types of mutual funds. Most service providers enable online investment mutual funds.

The Conclusion

If you are looking to invest in an ELSS fund in Delhi, the above-given information would help you a lot in understanding their basics. Whether you have been looking for long-term wealth creation, tax savings, stable returns, and others, ELSS funds are one of the best investment channels available today.

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