What are ELSS Funds?

Equity Linked Saving Scheme or ELSS is a type of mutual fund scheme that primarily invests in the stock market or Equity. Investments of up to 1.5 Lac done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act.

How ELSS Mutual Funds Work?

ELSS funds have to invest at least 80% of their corpus in equity or equity related instruments. These funds come with a lock in period of 3 years. This means you can sell your investment only after 3 years, from the date of purchase! However to maximize returns from ELSS funds.

The stocks are chosen from across market capitalization (Large Caps, Mid Caps, Small Caps) and industry sectors. These funds aim to maximize capital appreciation over the long run. The fund manager picks stocks after conducting an in-depth market research to deliver optimal risk-adjusted portfolio returns.

Why invest in ELSS funds for saving tax ?

Lock in period :

ELSS has the shortest lock-in period of three years. Tax-saving fixed deposits have a five-year lock-in, while PPF has a 15-year maturity.

High Returns:

ELSS funds have the potential to generate higher returns other Section 80C instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and tax saving bank fixed deposits over the long term.

SIP Option:

It is easy to invest in ELSS funds through a monthly SIP which will protect investors from market volatility.

Tax exemption:

Long Term Capital Gains from ELSS are tax free up to limit of ₹1 lac. Gains over 1 lac attracts a tax rate of just 10%. Lower tax rates, coupled with higher returns ensure the best post tax returns.

Who Should Invest?

Any Salaried individual or HUF who wants to save on taxes under section 80C can invest in ELSS mutual funds.

If you are a new investor, ELSS is an ideal choice, since in addition to tax benefits you get a flavour of equity investing and mutual funds.

Top 5 Best performing ELSS Mutual funds are given below:

Axis Long Term Equity Fund

5-year CAGR – 18.26 per cent

Industry allocation – Financial, Services, Technology,

BOI AXA Tax Advantage Fund

5-year CAGR -20.04 per cent

Industry allocation – Financial, Chemicals, Technology,

Canara Robeco Equity Tax Saver Fund

5-year CAGR -19.55 per cent

Industry allocation – Financial, Technology, Automobiles

DSP Tax Saver Fund

5-year CAGR -18.34 per cent

Industry allocation – Financial, Technology, Energy

Mirae Asset Tax Saver Fund

5-year CAGR – 24.16 per cent

Industry allocation – Financial, Technology, Energy

There are more than 35 ELSS funds in the market today and choosing the best one will be a futile exercise as past performance will not determine the future returns in mutual funds. It is better to stick with funds that have beaten their benchmark consistently over the long term.