Tax-efficient fund: Equity Linked Savings Scheme

ELSS is the only tax saving mutual fund which offers tax benefits u/s80C

In India, generally, people are attracted to tax-saving instruments such as post office saving schemes, PPF, etc. However, these instruments deliver lower returns which might not help an individual to fulfil their short-term goals as these are long term investment instruments and offer a lower rate of return. An individual should include the abovementioned instruments in their portfolio in order to maintain stability nevertheless, an individual also needs some investment instruments which deliver higher returns which will aid him to create wealth. Therefore, mutual funds offer Equity Linked Savings Scheme (ELSS) which deliver tax-efficient returns. This is the only mutual fund scheme that offers dual benefits of wealth creation and income tax benefits under section 80C, up to the limit of Rs 1.5 lakh.

ELSS is an open-ended equity-oriented scheme with a statutory lock-in period of 3 years along with tax benefits. The fund invests a minimum of 80% of total assets towards equity and equity-related instruments. As per AMFI, the net Asset Under Management of ELSS has increased from Rs 1,10,953.33 crores as of November 2020 to Rs 2,14,649.76 as of November 2021.

What you should know before investing? 

Diversification: As the name suggests, these funds invest a major chunk i.e. 80% of the total assets in equity. They diversify the corpus by investing in various companies across the different sectors of the economy and delivering optimal returns.

Investment horizon: ELSS funds have a lock-in period of 3 years; so, it’s mandatory to be invested for at least 3 years but you can remain invested even for a longer period of time. It is actually recommended to invest your capital in this fund for a longer period of time as these funds’ returns are dependent on the market, which is volatile in nature. You may not receive the desired returns in a 3-year time period as there are chances of incurring losses. So, it’s better to invest for a longer period like 5-7 years.

Risk profile: ELSS funds have the potential to offer higher returns but it also, comes along with risk. As these funds invest in equity, the risk is quite higher as compared to other tax-saving schemes. Anyone who chooses to invest in these schemes should assess their risk appetite and proceed further to invest. As there is volatility in the market, these funds become riskier to invest in. You shouldn’t invest just for tax-saving opportunities.

Mode of investment: You can invest via SIP as well as a lump sum. Most preferably, SIP is chosen as it gives the option to invest in small amounts and also, offers the benefit of rupee cost averaging. Investing a lump sum amount can be risky if you invest during a bullish market. Nevertheless, you can invest a lump sum when the market is bearish. The minimum amount of investment with which you can start your SIP in ELSS is Rs 500 and there is no capping for maximum investment.

Tax benefit: Tax benefits are the most attractive aspect of these funds. You get tax benefit u/s 80C of Income Tax Act, 1961 up to Rs 1.5 lakh.

Following table depicts the top-performing ELSS fund based on the 3-year return along with AUM and expense ratio: