What Are ELSS Mutual Funds? Features, Tax-Saving Benefits, and Tips to Maximise Returns
If you’re looking to invest in mutual funds that offer tax benefits and good returns, ELSS (Equity Linked Saving Schemes) may be the right choice for you. In this blog, we’ll cover everything you need to know about ELSS investments, including its benefits, types of funds, tax benefits, factors to consider, how to invest, and tips for maximising returns.
What are ELSS Funds?
ELSS is a type of mutual fund that invests primarily in equity shares. It comes with a lock-in period of three years, which means that you cannot withdraw your investment before three years. It offers potentially high returns due to its equity-based investments and tax benefits.
The investment in ELSS tax saving mutual funds is eligible for tax deductions under Section 80C of the Income Tax Act. ELSS tax benefits can be claimed up to ₹1.5 lakhs per year. Investing in ELSS can help you in tax savings while earning potentially high returns.
It also offers several benefits, such as good returns than other tax-saving mutual funds or other instruments like PPF and NSC, tax benefits, and the potential for wealth creation in the long run.
There are two types of ELSS funds available in the market: dividend and growth.
In dividend ELSS funds, investors can receive regular dividends, while in growth ELSS funds, the ELSS fund returns are reinvested into the scheme.
Best ELSS Mutual Funds in India
Here is a list of ELSS mutual funds to consider in 2024.
| ELSS Fund Name | Fund Size (in Cr) | Returns (p.a) |
|---|---|---|
| Quant Small Cap Fund | 3,983.77 | 62.76 |
| Bank of India Small Cap Fund | 385.94 | 54.20 |
| Quant Infrastructure Fund | 27,527.24 | 53.52 |
| Nippon India Small Cap Fund | 359.93 | 51.24 |
| Quant Mid Cap Fund | 181.35 | 50.84 |
| Quant ELSS Tax Saver Fund | 17,267.83 | 47.44 |
| Canara Rob Small Cap Fund | 43.22 | 47.11 |
| Quant Flexi Cap Fund | 1,484.56 | 47.05 |
| Edelweiss Small Cap Fund | 4,373.63 | 46.52 |
| Tata Small Cap Fund | 11,124.71 | 46.29 |
Disclaimer: 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: The data on the top ELSS mutual funds in India in the list is from 8th September 2024. However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!
How Does ELSS Work?
ELSS funds work by pooling money from investors and investing it in a diversified portfolio of stocks, bonds, and other securities. The fund manager, who is a professional investment expert, is responsible for selecting the securities that make up the portfolio.
When you invest in an ELSS fund, you are buying units in the fund. The value of your units can fluctuate based on the performance of the underlying securities. If the securities in the portfolio go up in value, the value of your units can also go up. Conversely, if the securities in the portfolio go down in value, the value of your units can also go down.
ELSS funds have a lock-in period of three years, which means that you cannot redeem your units before the end of the lock-in period. This lock-in period is in place to encourage long-term investing, as equity investments might be subjected to short-term fluctuations.
Features of ELSS Mutual Fund
Here are the key features of ELSS mutual funds:
- Tax Saving Investments: ELSS tax-saving mutual funds are equity-oriented, offering tax benefits under Section 80C. They are a popular choice among tax-saving investments due to their potential for higher returns compared to traditional tax-saving instruments like Public Provident Fund (PPF).
- Equity Exposure: ELSS funds invest at least 80% of their assets in equity and equity-related instruments. This exposure can lead to higher volatility, but it also offers the chance for greater returns over the long term.
- Lock-in Period: ELSS funds have a lock-in period of three years, the shortest among tax-saving mutual funds. During this time, withdrawals are not allowed, making them ideal for disciplined investing.
- Investment Options: ELSS funds can be invested in through a lump sum or SIP. The minimum investment in ELSS starts at Rs. 500, allowing easy access for all types of investors. SIP is often preferred as it spreads investment over time.
- Ease of Access: Investors can buy ELSS online, simplifying the investment process. Many platforms list ELSS mutual funds, helping investors compare and choose the best ELSS funds to invest in according to their needs.
- Tax Benefits: ELSS tax-saving funds provide a tax exemption on the invested amount, and the returns are partially exempt from taxes, enhancing the overall tax-saving benefits of ELSS mutual funds.
Factors to Consider Before Investing in Equity Linked Savings Scheme
- Risk Appetite: Equity Linked Savings Scheme investments might be more suitable for investors with a high-risk appetite.
- Investment Goals: Equity Linked Savings Scheme investments can be ideal for long-term financial goals like retirement planning, child’s education, and wealth creation.
- Investment Horizon: Equity Linked Savings Scheme funds have a lock-in period of 3 years, which can make them suitable for investors with a long-term investment horizon.
- Performance of the Good ELSS Funds: Investors should evaluate Equity Linked Savings Scheme funds based on their performance, past returns, and investment style.
- Diversification and Asset Allocation: Investors should diversify & manage portfolios and allocate funds across different asset classes to reduce risks.
How to Invest in ELSS Funds?
There are several ways to invest in Equity Linked Savings Scheme funds, such as direct investments and ELSS mutual funds. You can invest in the best ELSS funds directly by visiting the fund house’s website or through a broker.
You can also invest in ELSS funds through two primary modes:
- Lump Sum Investment: This involves investing a large amount of money at once. This is a good option if you have a surplus of funds and are comfortable with the risks of equity investing.
- Systematic Investment Plan (SIP): This involves investing a fixed amount of money at regular intervals, such as monthly or quarterly. SIPs allow you to invest smaller amounts over time, averaging out the cost of your investments and mitigating the impact of market fluctuations. ELSS mutual funds and SIPs are also popular ways of investing in Equity Linked Savings Scheme funds.
Why Invest in ELSS Mutual Funds?
Investing in ELSS mutual funds offers the dual advantage of potential capital appreciation and tax savings. ELSS provides equity exposure and tax benefits under Section 80C of the Income Tax Act.
ELSS funds have a lock-in period, typically three to five years. They offer a tax-efficient way to participate in the equity market.
Return on ELSS
When it comes to the returns of ELSS funds, they are subject to market risks and can vary based on the performance of the underlying equities. Since ELSS funds invest in stocks, their returns are influenced by the performance of the stock market.
It is important to note that ELSS funds have the potential to deliver higher returns. They can outperform other tax-saving options like fixed deposits or traditional savings schemes. However, you should understand that investing in equities carries a higher level of risk. This risk is higher compared to fixed-income investments.
ELSS returns can vary significantly from year to year and are influenced by market fluctuations. Over the long term, historically, equities have the potential to deliver higher returns compared to other asset classes. However, it is essential to keep in mind that past performance is not indicative of future results.
Who Should Invest in ELSS?
To evaluate Equity Linked Savings Scheme funds, you should consider factors such as past returns, fund manager experience, investment style, and expense ratio. It is also essential to diversify your investments and allocate your assets appropriately.
ELSS investments can offer the dual benefits of tax savings and capital appreciation. Thus, they can be suitable for individuals who have a high-risk appetite and a long-term investment horizon. So if you are looking to save taxes and create wealth in the long run, then ELSS can be a good investment option.
Benefits of ELSS investments
Here are some major Equity Linked Savings Schemes ELSS benefits listed below:
- High potential for investment in ELSS schemes due to equity exposure.
- Tax-saving benefits up to Rs. 1.5 lakh under Section 80C of the Income Tax Act
- Has a lock-in period of 3 years
- Portfolio diversification with exposure to different sectors and companies
- Invests a majority of the portfolio in equities, which may provide the potential for high returns.
- Allows for easy investment through SIPs and lump sum payments.
- Professional management by fund managers
ELSS Funds Tax benefits
One of the significant advantages of investing in Equity Linked Savings Scheme is the tax benefit it offers. The taxation on ELSS investments are eligible for tax deductions up to Rs 1.5 lakhs under Section 80C of the Income Tax Act. This means that you can reduce your taxable income by up to Rs 1.5 lakhs by investing in ELSS.
The maximum investment limit for ELSS is Rs 1.5 lakhs per annum. By investing in Equity Linked Savings Scheme, you can save up to Rs. 46,800 in taxes per annum if you fall under the highest tax bracket.
ELSS vs Other Investment Options
- Equity Linked Savings Scheme may offer higher potential returns than traditional tax-saving investments like PPF and NSC
- Equity Linked Savings Scheme can have a shorter lock-in period than other tax-saving investments like FDs and NPS
- Equity Linked Savings Scheme provides diversification and exposure to equity markets, which might not be available in fixed-income investments.
Tips for Maximising Returns on ELSS Investments
To maximise returns on your Equity Linked Savings Scheme investments, it is essential to stay invested for the long term and choose the right ELSS fund based on your risk appetite and investment goals. It can also be crucial to manage the risks associated with it. Here are some tips:
- Stay Invested for the Long-Term: Equity Linked Savings Scheme funds may offer potentially higher returns over the long-term, and investors should stay invested for the entire lock-in period.
- Systematic Investment Planning: Investors can invest in Equity Linked Savings Scheme funds through SIPs to average out the cost of investment.
- Diversification: Investors should diversify their portfolios and allocate funds across different asset classes to reduce risks.
- Regular Portfolio Review: Investors should review their portfolio regularly and rebalance it based on their investment goals and risk appetite.
- Risks Associated with ELSS Investments: Equity Linked Savings Scheme funds come with market risks, and investors should be aware of the risks associated with equity investments.
To Wrap It Up…
ELSS scheme is a tax-saving investment option that can offer good returns. Before investing in the best ELSS funds out there, consider your risk appetite, investment goals, and investment horizon. You can invest in ELSS mutual funds, or via direct investments or SIPs. By following these tips, you can achieve your long-term financial goals.
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FAQs on ELSS Mutual Funds
ELSS (Equity Linked Savings Scheme) mutual funds are tax-saving investment instruments that primarily invest in equities and equity-related securities. These funds offer tax benefits under Section 80C of the Income Tax Act. It has a mandatory lock-in period of three years.
ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund that helps investors save on taxes while offering potential growth through equity investments. ELSS mutual funds meaning revolves around their dual benefits of tax saving and wealth creation.
A tax saving mutual fund, like an ELSS scheme, helps investors reduce their taxable income by investing in equity funds that are eligible for tax deductions. These funds, including ELSS tax saving funds, provide the dual advantage of investment growth and tax savings.
ELSS mutual funds, known for their equity exposure and potential high returns, have a three-year lock-in period. It makes them one of the shortest among tax-saving instruments. Unlike other options like PPF or NSC, ELSS funds offer market-linked returns. Plus, ELSS mutual funds tax exemption is under Section 80C.
ELSS funds offer tax exemptions under Section 80C of the Income Tax Act. It allows you to claim deductions of up to ₹1.5 lakh per financial year.
Quant ELSS Tax Saver is a type of mutual fund that invests primarily in equities. It is designed to help investors save on taxes while aiming for potential long-term capital growth.
ELSS mutual funds come under Section 80C of the Income Tax Act. It allows investors to claim deductions on investments up to ₹1.5 lakh annually.
An ELSS scheme mutual fund is a tax-saving investment that primarily invests in equities. It combines the benefits of market-linked returns and tax efficiency.
