What are ELSS Funds and how to invest in India?

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Mutual funds have been the talk of the town in the last few months. SIPs have picked up the pace and have become one of the most sought after investments for retail investors. One category of mutual funds does not just provide capital appreciation in the long term but also can be used as a suitable avenue for tax savings. This category of the mutual fund is termed as Equity Linked Savings Scheme (ELSS).

What are the ELSS funds?

ELSS funds in India are meant to provide two-fold benefits of capital appreciation and tax savings. For this reason, it is deductible under Section 80C of the Income Tax Act (deduction up to Rs. 1.5 lakhs).

ELSS funds are open-ended in nature and come with a mandatory lock-in period of three years. These invest a minimum of 80% of its assets inequities. This lock-in holds a key advantage and instills in us the approach of disciplined investing.

Owing to positive returns in the last few years and the key benefit of tax savings, ELSS Tax Saving Mutual Funds is considered one of the best investment options available to investors today.

Key Benefits: –

  1. Lock-in period of three years hence leads to a disciplined way of investing. As ELSS funds invest 80% of their corpus into equities, given the lock-in period, the short term volatility in the markets is taking care of;
  2. Tax deduction up to Rs. 1.5 lakhs annually per assessed (both lump sum and through SIPs);
  3. Past data suggests that most ELSS funds have generated better returns than other common instruments for investment such as PPF, FDs, Post Office schemes, etc.
  4. The availability of SIPs, as well as a wide variety of choices amongst various schemes, has made this category one of the most growing investment options for retail investors. Also the minimum investment limit in case of such schemes in only Rs. 500 and hence not a pinch in the pockets.

Let us now look at a few of the differences which make ELSS a better option than other common investment avenues.

Particular Lock-in Tax Benefits Returns (Probable) Investment Risk
ELSS 3 years Yes ~12%-14% Moderate- High
PPF 15 years Yes ~8% Low
Post Office MIS 5 years No ~7.5% Low
Fixed Deposits 1-10 years No ~6%-6.5% Low

Looking at all the factors shown above, we can easily decipher that ELSS stands out as the best category of investment if money is put for a longer term horizon.

However, investors should note that ELSS comes with an adequate amount of risk and hence should only necessitate investment if the investor’s appetite allows.

Which are the best ELSS funds in the market?

To help investors make the best choice in terms of ELSS investment, let us look at a few of the best ELSS funds in India along with the key performance parameters: –

Fund 1-Year Return 3-Year Return 5-Year Return SINCE INCEPTION Portfolio Turnover Top 5 Stocks (%)
Axis Long Term Equity Fund 21.3% 15.8% 13.7% 20.2% 40% 40%
DSP Tax Saver Fund 20.1% 12.3% 12.4% 16.3% 77% 32%
Mirae Asset Tax SaveR Fund 18.1% 17.3% N.A. 19.2% 24% 30%
ADITYA BIRLA tax relief ’96 fund 8.7% 11.6% 12.4% 16.3% 1% 37%

The above funds have performed better than the category benchmark and are the amongst the best ranked funds. Fund managers of the above mentioned funds have more biased towards large caps and have benefited a lot due to the recent rally in Nifty 50.

Therefore, investors have a higher risk appetite, opting for tax benefits and considering a long term investment horizon should consider the above funds. It is also recommended to hold these funds for at least five to seven years to unlock the full potential and not just restrict the investment to three years.

Investing in ELSS funds in India

The best and the simplest way to invest in an ELSS scheme is through the online medium. Investors can easily invest in the scheme by logging into the AMC’s website for the ELSS in question. The following step requires feeding in key details such as name, PAN card, amount of investment, type of investment i.e. SIP or lump sum, date of SIP deduction if applicable, linking of bank account mandate form, etc.

However, another convenient way to invest is to log into Groww’s website and create an account. There are a variety of schemes to choose from and the best part is investors can have a single dashboard to reflect on all the funds.

Happy Investing!

Disclaimer: This is just a list of well-performing funds based on past performance and not a recommendation. Please invest according to your risk profile and investment objective.

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