ELSS Mutual Funds
The ELSS fund stands for Equity Linked Savings Scheme. It is an instrument of a long-term capital asset for saving income tax in India. Not all ELSS plans are the same, and they do not necessarily fit in with everyone’s investment objectives and risk appetite. Therefore, you must invest in a scheme that fits with your risk profile and financial goals.
Who Should Invest in ELSS Mutual Funds?
ELSS funds are appropriate for taxpayers prepared to take the risk of an equity-oriented tax-saving device. Because they have a consistent source of income and must make tax-saving investments every year, ELSS funds are better suited for the salaried class. In reality, they can profit from rupee cost averaging by investing in ELSS through SIP monthly.
If you are a young taxpayer, you can take advantage of the dual benefit of investing in ELSS, namely the tax deduction under Section 80C and the long-term growth potential of equities, by investing in ELSS yearly. While senior taxpayers can invest in ELSS to take advantage of the tax benefits, the equity risk inherent in ELSS necessitates a longer investment horizon, which they may lack.
Keep in mind that ELSS funds have a 3-year lock-in period.
If you invest now, you cannot withdraw your money until three years have passed if you made a lump sum investment.
Each SIP payment is also subject to the lock-in term.
You must wait until the final SIP instalment has finished three years if you wish to withdraw the entire money invested over 12 months.
However, to experience the true growth potential an ELSS can provide, you must continue with your investments after the lock-in period has passed.
Compared to someone who may be close to retirement, a young taxpayer with many years of productive work ahead of them is better able to make use of the dual benefits of an ELSS.
However, ELSS may be an alternative to examining if a person has the appropriate risk tolerance and still has five to seven years till retirement.
Therefore, ELSS may be your preferred alternative for tax savings, depending on your age, risk tolerance, and other obligations like home and student loan debt that make the previous tax system more suitable for you.
Features of ELSS Mutual Funds
An ELSS can be purchased by an individual or HUF, both under the same PAN. Here are some of the features of ELSS that are worth considering:
- The money invested in an ELSS earns tax-free interest, and capital gains in an ELSS fund are entirely free from tax. However, investors should note that if they hold more than 100 shares with a single company, there might be some restrictions on withdrawal.
- Dividends distributed by the mutual fund cannot be encashed or withdrawn before maturity. The dividend income received after the completion of three years will also get a tax benefit if it fulfils all conditions for this purpose.
- All ELSS mutual funds offer diversification and risk mitigation through equities, which help in boosting returns. The capital gains of the best tax saving mutual funds are exempt from taxes if held for more than one year.
Factors to consider while investing in ELSS Funds
Investment horizon
To contemplate investing in ELSS funds, you must have a longer investment horizon than five years. To limit market volatility, the equity exposure of ELSS funds necessitates a longer investment horizon.
Returns
You should be aware that ELSS funds do not give guaranteed returns because they are entirely contingent on the performance of the underlying stocks. A longer investment horizon, however, can yield more significant returns than any other tax-saving investment alternative.
Lock-in term
ELSS mutual funds have a three-year lock-in duration. Your investments are legally locked in for three years from the date of purchase, and you cannot redeem them until that time has passed.
The annual tax exemption is limited to Rs.1.50 lakh
Remember that your tax exemption will be restricted to Rs.1.50 lakhs yearly, regardless of how much you invest. The amount you invest is immaterial. Second, this is a broad umbrella limit. For example, if you have already deposited Rs.1.20 lakh in CPF and LIC premiums, your tax exemption on the ELSS fund will be Rs.30,000. It must be considered when determining your post-tax yield.
Best ELSS Mutual Funds
Here is a quick look at some of the mutual fund investment options that have provided high returns to investors:
Axis long-term Equity Fund
The scheme aims to achieve consistent long-term capital growth through diverse equity and equity-related securities portfolio. The scheme will invest in companies with high growth potential and a long-term business model.
Fund’s Performance
Its trailing returns over various periods are as follows: -3.51 percent (1 year), 15.25 percent (3 years), 11.79 percent (5 years), and 16.28 percent (6 years) (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 67.8133 as on 8 August
- 5 Year CAGR: 12 %
- Expense Ratio:1.61
- AUM in Crores: 27627.687
- Inception Date: 29 December 2009
- Fund Manager: Jinesh Gopani
- SIP (Minimum Amount): INR 500/-
- Minimum Lumpsum: 500
The one-year annualized returns of the fund are -2%, whereas the 3-year and 5-year annualized returns are -15.4 % and 12 %, respectively, in this case.
Invesco India Tax Plan-Growth fund
The programme seeks long-term capital growth through a diverse portfolio of equity and equity-related instruments. It seeks to invest across market capitalization industries from the bottom up. It will strive for a concentrated, well-researched portfolio of 20 to 50 stocks.
Fund’s Performance
Its trailing returns over various periods are as follows: -1.75 percent (1 year), 17.11 percent (3 years), 11.36 percent (5 years), and 13.98 percent (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 77.83 as on 8 August
- 5 Year CAGR: 11.7 %
- Expense Ratio:2.05
- AUM in Crores: 1671.271
- Inception Date: 29 December 2006
- Fund Manager : Dhimant Kothari , Amit Nigam
- SIP (Minimum Amount): INR 500/-
- Minimum Lumpsum: 500
The one-year annualized returns of the fund are -0.2%, whereas the 3-year and 5-year annualized returns are 17.2 % and 11.7 %, respectively, in this case.
DSP Tax Saver Fund
The scheme attempts to create medium to long-term capital appreciation from a diversified portfolio primarily comprised of corporate equity and equity-related instruments and provide investors with a deduction from total income as permitted by the Income Tax Act.
Fund’s Performance
Returns: Its trailing returns over various periods are as follows: 2.59 percent (1 year), 20.29 percent (3 years), 12.58 percent (5 years), and 14.33 percent (10 years) (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 80.509 as on 8 August
- 5 Year CAGR: 13.1 %
- Expense Ratio:1.78
- AUM in Crores: 9966.020
- Inception Date: 18 January 2007
- Fund Manager: Rohit Singhania, Charanjit Singh
- SIP (Minimum Amount): INR 500
- Minimum Lumpsum: 500
The one-year annualized returns of the fund are 3.7%, whereas the 3-year return is 19.8 %. The 5-year annualized return is 13.1 % in this case.
Edelweiss Arbitrage Fund Regular Growth
The scheme intends to create income primarily through investing in arbitrage possibilities in the cash and derivative segments of the equity markets and arbitrage opportunities available within the derivative segment, with the remainder invested in debt and money market instruments.
Fund’s Performance
Its trailing returns over various periods are as follows: 3.55 percent (1 year), 4.21 percent (3 years), 5.02 percent (5 years), and 5.89 percent (5 years) (since launch). Category returns for the same period are 3.02 percent (1 year), 3.8 percent (3 years), and 4.65 percent (5yr).
Minimum Investment
The minimum investment required is Rs 5000, and the minimum additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 15.8994 as on 8 August
- 5 Year CAGR: 5 %
- Expense Ratio:1.07
- AUM in Crores: 6992.798
- Inception Date: 27 June 2014
- Fund Manager Dhawal Dalal, Bhavesh Jain
- SIP (Minimum Amount ):1000
- Lumpsum Minimum: 5000
The one-year annualized returns of the fund are 3.5%, whereas the 3-year and 5-year annualized returns are 4.2 % and 5 %, respectively, in this case.
Aditya Birla Sun Life Tax Relief 96 fund
The programme aims for long-term capital growth and will invest roughly 80% of its assets in equity, with the remainder in debt and money market instruments. With effect from July 1999, it was transformed into an open-ended scheme. A top-down and bottom-up approach will be used in the stock selection procedure.
Fund’s Performance
Its trailing returns over various periods are as follows: -2.14 percent (1 year), 12.07 percent (3 years), 7.39 percent (5 years), and 22.12 percent (10 years) (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 41.07 as on 11 August
- 5 Year CAGR: 8.4 %
- Expense Ratio:1.77
- AUM in Crores: 13738.431
- Inception Date: 6 March 2008
- Fund Manager: Dhaval Gala , Atul Penkar
- SIP (Minimum Amount ):0
- Lumpsum Minimum: 500
The one-year annualized returns of the fund are 1.4%, whereas the 3-year and 5-year annualized returns are 12.3 % and 8.4 %, respectively, in this case.
L & T tax advantage fund
The programme seeks long-term capital growth through a diverse portfolio of equity and equity-related instruments.
Fund’s Performance
Its trailing returns over various time periods are as follows: -0.16 percent (1 year), 15.11 percent (3 years), 8.22 percent (5 years), and 13.21 percent (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 77.47 as on 8 August
- 5 Year CAGR: 8.3 %
- Expense Ratio:2.01
- AUM in Crores: 2874.527
- Inception Date: 27 February 2006
- Fund Manager: Vihang Nayak, Cheenu Gupta
- SIP (Minimum Amount ):500
- Lumpsum Minimum: 500
The one-year annualized returns of the fund are 1.9%, whereas the 3-year and 5-year annualized returns are 15.2 % and 8.3 %, respectively, in this case.
Parag Parikh Tax Saver fund
The scheme seeks long-term capital appreciation by investing in a diverse range of equities and equity-related assets. (According to the Ministry of Finance’s Equity Linked Saving Scheme, 2005, 80 percent of total assets)
Fund’s Performance
Its trailing returns over various periods are as follows: 10.0 percent (1 year), 23.4 percent (3 years), and 23.02 percent (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 1000.
- NAV of 18.9974 as on 11 August
- Till date CAGR: 23.4 %
- Expense Ratio:2.24
- AUM in Crores: 680.092
- Inception Date: 26 July 2019
- Fund Manager: Raj Mehta, Rukun Tarachandani, Raunak Onkar, Rajeev Thakkar
- SIP (Minimum Amount ):1000
- Lumpsum Minimum: 500
The fund’s one-year and 3-year annualized returns are 12.9% and23.3 %, respectively, whereas the 5-year annualized returns are not applicable in this case.
HDFC Tax Saver fund
The programme aims to create capital appreciation and income from a portfolio primarily comprised of equities and equity-related assets.
Fund’s Performance
Its trailing returns over various periods are as follows: 12.75 percent (1 year), 16.54 percent (3 years), 8.51 percent (5 years), and 23.31 percent (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 770.626 as on 8 August
- 5 YearCAGR: 8.7 %
- Expense Ratio:1.88
- AUM in Crores: 8715.763
- Inception Date: 31 March 1996
- Fund Manager: Sankalp Baid, Roshi Jain
- SIP (Minimum Amount ):500
- Lumpsum Minimum: 500
The one-year annualized returns of the fund are 14.2%, whereas the 3-year and 5-year annualized returns are 17.3 % and 8.7 %, respectively in this case.
Union Long Term Equity fund
The scheme aims for long-term financial appreciation by investing heavily in a portfolio of equities and equity-related instruments.
Fund’s Performance
Its trailing returns over various periods are as follows: 6.58 percent (1 year), 21.53 percent (3 years), 12.87 percent (5 years), and 14.33 percent (10 years) (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 42.35 as on 11 August
- 5 Year CAGR: 14.2 %
- Expense Ratio:2.53
- AUM in Crores: 525.854
- Inception Date: 23 December 2011
- Fund Manager: Vinay Paharia, Sanjay Bembalkar
- SIP (Minimum Amount ):500
- Lumpsum Minimum: 500
The one-year annualized returns of the fund are 9.6%, whereas the 3-year and 5-year annualized returns are 21.8 % and 14.2 %, respectively in this case.
Mahindra Manulife ELSS Kar Bachat Yojna fund
The scheme seeks long-term capital appreciation by investing in a diverse range of equities and equity-related assets.
Fund’s Performance
Its trailing returns over various periods are as follows: 8.33 percent (1 year), 22.39 percent (3 years), 11.78 percent (5 years), and 13.55 percent (since launch). Category returns for the same period are: 4.05 percent (1 year), 18.47 percent (3 years), and 10.98 percent (5yr).
Minimum Investment
The least necessary investment is Rs 500, and the additional investment is Rs 500. The minimum SIP investment is Rs 500.
- NAV of 19.0252 as on 11 August
- 5 Year CAGR: 10.8 %
- Expense Ratio:2.49
- AUM in Crores: 485.365
- Inception Date: 18 October 2016
- Fund Manager: Manish Lodha, Fatema Pacha
- SIP (Minimum Amount ):500
- Lumpsum Minimum: 500
The one-year annualized returns of the fund are 9.4%, whereas the 3-year and 5-year annualized returns are 20.7 % and 10.8 %, respectively in this case.
Frequently Asked Questions
ELSS funds provide up to INR 1,50,000 tax deductions under Section 80C of the Income Tax Act, 1961. It helps you save up to INR 46,000 a year in taxes.
ELSS funds are appropriate for taxpayers prepared to take the risk of an equity-oriented tax-saving device. Because they have a consistent source of income and must make tax-saving investments every year, ELSS funds are better suited for the salaried class.
If you are a young taxpayer, you can take advantage of the dual benefit of investing in ELSS, namely the tax deduction under Section 80C and the long-term growth potential of equities, by investing in ELSS every year. While senior taxpayers can invest in ELSS to take advantage of the tax benefits, the equity risk inherent in ELSS necessitates a longer investment horizon, which they may lack.
ELSS funds have a 3-year lock-in period. If you invest now, you cannot withdraw your money until three years have passed if you made a lump sum investment.
Each SIP payment is also subject to the lock-in term.
You must wait until the final SIP instalment has finished in three years if you wish to withdraw the entire money invested over 12 months.
Some factors that need to be considered before investing in ELSS Funds are investment horizon, returns, lock-in term, and the annual tax exemption limit.
Tax saving mutual funds, also known as ELSS funds, are mutual funds that help save income tax on the profit gained from selling units of mutual funds at the end of a particular year or after a specific period. The government has announced various incentives for investors to save taxes on the capital gain from selling mutual funds units. Commonly people invest their money in mutual funds schemes since it helps save taxes on capital gains made every year. There are three types of mutual fund schemes eligible for saving taxes: equity, debt, and hybrid oriented funds.
Several types of mutual funds are available in India, including dividend funds, index funds, growth funds, etc. ELSS or Equity Linked Savings Scheme is one of the investment options offered by mutual fund companies in India.
The main difference between tax saving mutual funds and equity-linked savings schemes is that the former is a must for income tax purposes while the latter can be a part of a long-term financial plan.
Equity Linked Savings Scheme (ELSS) works like an insurance scheme. The invested money goes into a non-linked insurance fund, and the interest earned on this investment is tax-free. This interest is credited at the end of every year and is called ‘equated monthly instalment’. There is no upper or lower limit for investment in ELSS lock in period. And every individual is eligible to purchase these funds.
Investors can save on taxes by investing in ELSS funds if they do not claim deductions on their annual income return. ELSS funds are so-called because they provide an exemption from capital gains tax on investments made through them, unlike other mutual funds where long term capital gains are taxed at 15%. So these funds are also called funds that allow ‘tax-free’ growth over three years or more depending upon the fund you choose to invest in.
There are many ELSS funds available in the market today. But choosing the best ELSS fund with the ELSS tax benefit is not an easy task. You need to do your homework and select the best ELSS fund for you. Here is a guide to help you find the best ELSS fund for you:
Review the past performance of over 1, 3 and 5 years before investing.
Choose a fund with consistently higher returns and lower volatility. The riskier the fund, the more volatile its returns are likely to be.
The fund should be managed by an experienced fund manager who has a good track record of consistently beating benchmark returns. The fund should have a low expense ratio. It should have standard tracking error and high liquidity.
Choose a diversified ELSS fund with a long track record of consistent performance. Always check the past performance of the scheme before investing in it.
Under section 80C of the IT Act, the tax benefit offered by investing in ELSS tax saving funds is 50% of your investment, capped at Rs 1,50,000 for a financial year. This means that this amount reduces your taxable income and your tax liability. Any amount invested over and above the limit of Rs 1,50,000 will not attract any tax benefit.
The interest earned on fund corpus is another tax benefit. Since you invest in equity-oriented mutual funds, the expected return should be higher than fixed income products like Public Provident Fund (PPF). The interest earned on the corpus is entirely tax-free.
There are many tax saving mutual funds in India where you can invest to save taxes. But which is the best ELSS or other tax-saving mutual fund option in India? Well, there is no one-size-fits-all answer. It depends on a lot of factors such as your investment horizon, risk appetite and so on.
There are many tax-saving investment options under Section 80C of the Income Tax Act. The most popular ones are ELSS, NPS, PPF, Mutual Funds, Sukanya Samriddhi Account and Fixed Deposits. Tax saving mutual funds are a great way to save for retirement and other financial goals.
These funds offer significant tax breaks and provide liquidity, two of the main benefits of investing in mutual funds. However, when choosing a tax-saving mutual fund, your best bets are equity-oriented balanced funds with large fund sizes.
Tax saving mutual funds are a great way to save on taxes. They provide a way to invest in equity and debt instruments to earn you good returns while reducing your tax liability. We have tried to do a comprehensive analysis of all the popular ELSS funds in India and help you pick the best ELSS fund for you.