ELSS – Meaning, Tax Benefits, and 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 maximizing 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 funds are 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.
Top 10 ELSS Funds That You Must Consider
Here are the top ELSS investments that you must consider investing in 2023.
| ELSS Fund Name | Fund Size (in Cr) | Returns (p.a) |
|---|---|---|
| Quant Tax Plan | ₹4,957 | +30.44% |
| Bank Of India Tax Advantage Fund | ₹860 | +23.07% |
| SBI Long Term Equity Fund | ₹15,587 | +21.77% |
| Motilal Oswal ELSS Tax Saver Fund | ₹2,508 | +21.42% |
| HDFC ELSS Tax Saver Fund | ₹11, 272 | +21.14% |
| JM ELSS Tax Saver Fund | ₹91 | +20.91% |
| Union Tax Saver Fund | ₹695 | +20.57% |
| Franklin India Taxshield Fund | ₹5,224 | +20.51% |
| DSP Tax Saver Fund | ₹11,693 | +20.36% |
| Mahindra Manulife ELSS Tax Saver Fund | ₹659 | +20.33% |
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 23rd November 2023. 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: ELSS is the only tax-saving investment option that is also equity-oriented. This means that it has the potential to offer higher returns than other tax-saving instruments, such as Public Provident Fund (PPF) and National Savings Certificate (NSC).
- Equity Exposure: ELSS funds may invest at least 80% of their assets in equity and equity-related instruments. This means that they can be more volatile than other types of mutual funds, but they also have the potential to offer higher returns over the long term.
- Lock-in Period: ELSS funds have a lock-in period of three years. This means that investors cannot withdraw their money for the first three years after investing.
- Investment Options: ELSS funds can be invested in through a lump sum or through a Systematic Investment Plan (SIP). SIP is a popular way to invest in ELSS funds, as it allows investors to invest a small amount of money at regular intervals.
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 through equity exposure and tax savings under Section 80C of the Income Tax Act. ELSS has a lock-in period, typically three to five years, and provides 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 compared to other tax-saving investment options like fixed deposits or traditional savings schemes. However, it is also important to understand that investing in equities carries a higher level of risk 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 Maximizing Returns on ELSS Investments
To maximize 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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