Do you wish to save taxes on your earnings while exploring the potential for higher returns? Look no further! In the realm of tax-saving investments, ELSS Funds are the powerhouses of tax saving.
In this article, we will take to you through the journey of ELSS Funds unpacking the features, benefits & much more about them. Let’s get Started!
ELSS Funds: Full Form, Meaning & Explanation
ELSS funds stand for “Equity Linked Savings Scheme”. It is a type of mutual fund that primarily invests in equity and equity-related instruments offering the investors potential for capital appreciation in the long term.
ELSS funds are also popular for their tax benefits under Section 80C of the Income Tax Act 1961. This Act allows individuals to claim a deduction up to a certain limit on their taxable income if they made an investment in ELSS funds.
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ELSS Funds Vs Equity Funds
ELSS funds and Equity funds both primarily invest in equity & equity-related instruments. However, there are some key differences between the two. Here are some chief key differences:
1. Equity Exposure
ELSS funds are required to invest at least 80% of their assets in equity but equity funds do not have a mandatory percentage of equity exposure.
In the Indian context, it is to be noted that any mutual funds with investments less than 65% in equity & equity-related instruments are not considered equity funds.
2. lock-in period
ELSS funds have a mandatory lock-in period of three years. It simply means investors can not redeem or withdraw their investments before three years.
On the other hand, Equity funds may or may not have a lock-in period based on rules set by the mutual fund company for a specific equity fund. Some equity funds may have a lock-in period while others may offer to redeem investments anytime.
Related Read: Equity Vs Debt Vs Hybrid Funds
Features & Benefits Of ELSS funds
Some distinct features of ELSS Funds set them aside from other types of mutual funds. Below are the key features & benefits of ELSS Funds.
1. Potential for higher returns
As we know ELSS Funds predominantly invest in equity funds, they have the potential to generate higher returns than any other mutual funds. With that said, it is also worth noting that the potential for higher returns is typically associated with higher levels of risk.
2. Shortest Lock-in period Among Tax Saving options
A lock-in period of three years is a key feature of ELSS funds. But did you know it is the shortest lock-in period among all tax saving options under section 80c of income tax?
This shorter lock-in period of ELSS funds offers investors more flexibility and liquidity compared to other tax-saving options.
3. Professional Management
ELSS funds are actively managed by experienced fund managers. They invest most of their time to research and analyze stocks so that they can produce great results for their investors.
4. Multiple ways of investing
Multiple options help different types of investors to decide the ones best for them. ELSS funds also offer multiple ways of investing. You can invest in one go through lump sum investment or in a disciplined manner through Systematic Investment Plan (SIP).
Tax Benefits of ELSS Funds
ELSS funds might be a good option for investors who want to save taxes along with capital growth. These funds offer lucrative tax benefits to investors and salaried individuals
Under Section 80C of the Income Tax Act of 1961, Investments made in ELSS funds are eligible for a deduction of up to ₹1.5 lacs from the taxable income in the financial year of investment.
Note! Capital gains and dividend payouts from ELSS investments are subject to income tax & Dividend Distribution Tax (DDT) respectively.
ELSS Vs Other Mutual Funds
ELSS & other mutual funds are investment options available to investors. Among various types of mutual funds, each one has distinct features so ELSS funds have. We can conduct a comparison between ELSS & other mutual funds based on various grounds discussed below.
- Tax Benefits: ELSS funds are especially designed for tax saving and it is popular for the same. On the other hand, other mutual funds may or may not provide similar tax benefits.
- Lock-in Period: Different types of mutual funds come with different lock in periods but ELSS funds have mandatory lock in period of three years.
- Portfolio: At least 80% of the portfolio of ELSS is concentrated to equity and equity related instruments making it riskier than any other mutual fund such as debt fund or hybrid funds.
- Risk & Return: Having a concentrated portfolio of equity holdings ELSS funds come with higher level of risk. However, higher risk is also connected with the potential for higher returns.
ELSS Vs PPF
The following table easily explain the differences between ELSS and PPF.
| Ground | ELSS | PPF |
| Lock-in Period | 3 Years | 15 Years |
| Investment Limit | No Maximum Limit | INR 1.5 Lakh Per Year |
| Returns | Potentially Higher Returns | Fixed Returns Around 7.1% |
| Level Of Risk | High Risk Due To Exposure to Equity | Low Risk as PPF is Backed By The Government |
| Liquidity | Can Redeem After Lock-in Period | Partially Withdrawals Allowed After 7 Years |
| Investment Type | Mutual Funds Investment | Government-sponsored Savings Scheme |
Selecting The ELSS Funds
Selecting a mutual fund is entirely a subjective process. You can select a ELSS fund by self analyzing the following points discussed below. However, you must seek a financial expert if you feel the process difficult.
- Define your tax-saving goals.
- Explore available tax-saving options.
- Evaluate your risk profile to understand how much you should invest in ELSS funds.
- Prepare a list of ELSS funds you are interested in.
- Assess Fund Performance of each fund one by one.
- Look for the expense ratios of each fund.
- Conduct a comparison between different ELSS funds.
- Decide which one best suits you.
Detailed Guide: How to Select A Mutual fund
How to Invest In ELSS
Investing in ELSS funds is a very easy process. Almost all mutual fund companies offer ELSS funds. Investing in ELSS involves these steps:
- Research & analyse best fit ELSS fund for you.
- Open a Demat, SIP or Mutual fund account based on your need and style of investment.
- Present the required documents and complete you KYC.
- Fill out the application for the selected ELSS funds & submit it.
- Once the application is processed, make the payment.
- Monitor & review your investments periodically.
FAQs
What is the lock-in period for ELSS funds?
The lock-in period for ELSS funds is three years in 2023.
Can I invest in ELSS funds through a Systematic Investment Plan (SIP)?
Yes, you can invest in ELSS funds through A SIP or lump sum mode.
What is the risk associated with investing in ELSS funds?
There are some risks associated with investing in ELSS funds such as market risk, volatility risk, liquidity risk etc.
Can I redeem or withdraw my investment before the completion of the lock-in period?
No, there is no option to redeem or withdraw investments before the completion of the lock-in period.
Can I invest in ELSS funds through an online platform or mobile app?
Yes, you can. In fact, they are the most popular ways nowadays.
Can I switch or transfer my investments from one ELSS fund to another?
If you want to switch it to another ELSS fund or fund house, you can do that after the completion of lock-in period.
Are ELSS funds suitable for non-resident Indians (NRIs) or foreign investors?
As they are especially designed for tax saving, they may not be suitable for NRIs. However, NRIs can independently invest in ELSS funds.
