Benefits of Investing in ELSS Mutual Fund

4 mins read

Currently, there are numerous investment opportunities in the market; however, the returns generated from most of them are taxed under the Income Tax Act. Equity Linked Savings Scheme stands out as it is a tax saving mutual fund.

What is an ELSS Mutual Fund?

Equity Linked Savings Scheme (ELSS) are funds that invest majorly (at least 80%) in equity and equity-linked securities, and a part of the corpus is invested in debt.

ELSS provides the dual benefit of capital appreciation as well as a tax benefit. One can avail of a tax exemption of up to INR 1.5 lakhs under section 80C of the Income Tax Act, 1961.

An individual or HUF can invest in this tax saver fund. It is important to understand that a certain amount of risk is attached to ELSS as it has equity exposure and would be best suited for an individual who understands the equity asset class risk.

Benefits of ELSS Mutual Fund

Tax Benefit:

The primary reason for choosing ELSS is the tax-saving benefit attached to it. The invested amount is exempted under the Income Tax Act for up to 1.5 lakhs. Any investment beyond 1.5 lakhs does not provide tax benefits.

Lowest lock-in period:

ELSS funds usually have a minimum lock-in period of 3 years which starts on the date of purchase. Whereas the other tax-saving products available in the market, such as PPF, NPS or FDs, have a lock-in period of more than 5 years.

SIP or Lumpsum:

ELSS investment can be carried out by investing monthly through SIP or making a single lump sum investment.

Dividend and Growth:

ELSS funds have two investment options: Growth and Dividend (includes dividend reinvestment and dividend payout). In the growth option, money is reinvested, and dividends are not paid to the investor, whereas in the dividend option, an investor gets the dividend amount which is taxable.

Tax on Returns:

On redeeming ELSS, the gains are taxable as long-term capital gains (LTCG). Any LTCG above 1 lakh per financial year is taxed at 10%

Diversification:

According to the fund’s investment objective, these funds primarily invest in stocks of listed companies in a specific proportion. The stocks are chosen from market capitalization (large, mid, and small caps) and industry sectors.

Minimum Investment Amount:

Most ELSS allows investors to start with a minimum amount of INR 500, allowing one to start investing at a comfortable pace without having to accumulate a corpus.

ELSS vs Other Tax Saving Investments

The other tax-saving products available in the market, such as PPF, NPS, or FDs, have a longer lock-in period of more than five years. In contrast, ELSS does not have a maximum investment tenure and can be withdrawn after a lock-in period of 3 years.

The returns generated from ELSS are higher compared to other tax-saving products. Higher returns are a result of the risk taken by the fund houses by investing in equities.

Factors to consider before investing in ELSS Mutual Fund

Fund Returns:

An investor should benchmark the fund’s performance with its peers and check if the fund has provided consistent returns in the past. If the fund outperforms compared to competitors, it will generate higher returns.

History of the Fund House:

It is recommended to choose a fund based on governance, years of experience of the fund manager and fund house, along with the consistency of generating returns year on year.

Expense Ratio:

Expense ratio is how much of an investor’s investment goes towards managing the fund, and it is calculated as a percentage of NAV. A low expense ratio indicates higher returns post expenses, therefore always better to go with a fund with the least expense ratio.

Financial Parameters:

Standard deviation, Sharpe ratio, Alpha, and Beta are parameters to analyze the performance of a fund. A higher standard deviation and beta highlight risk compared with a lower deviation and beta. Sharpe ratio is the return of the fund against the risk. Beta is the volatility of the fund compared to the market. A beta higher than one indicates a higher return. Alpha measures the excess return over the benchmark, meaning higher alpha indicates a better fund.

An ideal investment duration for ELSS would be 5-7 years, as it takes an entire business cycle for equity markets to stabilise. Although the lock-in period is of 3 years, staying invested long term reaps maximum benefit to investors.

ELSS Mutual Funds in India

Below is a list of funds based on the past three years’ returns.

Tax saver fund 1-year return 3-year return 5-year return
Quant Tax Plan 115% 22% 22%
Mirae Asset Tax Saver Fund 69.72% 15.44% 19.98%
Canara Robeco Equity tax saver fund 58.4% 15.28% 15.85%

Note: It is not a recommendation to invest in the above-mentioned funds based on the last 3 years’ performance. Investing in a fund depends on the individual’s financial goals, risk appetite, and investment horizon.