Tax-free Mutual Funds

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Section 80C of the Income Tax Act, 1961 permits you to deduct up to Rs 1,50,000 in taxes. The best investment option in this Section is ELSS. ELSS mutual funds are also known as tax-advantaged mutual funds. By investing in these mutual funds, you can benefit from tax deductions and long-term wealth creation.

What is an Exchange-Traded Long-Term Savings Plan (ELSS) Mutual Fund?

Equity-Linked Savings Schemes (ELSS), sometimes known as tax-saving funds, are a diversified type of mutual fund. While they engage primarily in stock and equity-related securities, they also invest in debt products.

Because ELSS is covered by Section 80C, you can claim tax deductions of Rs 1,50,000 per year. This would enable you to save up to Rs 46,800 in taxes per year. These funds are subject to a three-year obligatory lock-in term, the shortest of all 80C alternatives.

How to Conduct an Evaluative Analysis of the Best ELSS Mutual Funds

Returns on Investments

Compare the fund’s performance against that of peers to determine that the fund’s performance has remained consistent over time. You can invest in the recommended funds based on these factors. However, keep in mind that past performance does not guarantee future results. Future returns are contingent on market conditions and the fund manager’s decisions.

The Fund’s History

Choose fund firms with a track record of steady performance over a long period, say five to ten years. The success of a fund is determined by the quality of the equities in its portfolio and its benchmark.

Ratio of Expenses

The expense ratio indicates how much your investment is spent on fund management. A lower expense ratio equates to a higher rate of return on investment. Therefore, if two funds have a comparable track record and asset allocation, you should select the one with the lowest expense ratio.

Ratios financiers

Analyze a fund’s performance using several parameters such as Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta. A fund with a more significant standard deviation and beta is considered riskier than one with a lower standard deviation and beta. Choose funds with a higher Sharpe Ratio since they give a more significant return for the increased risk. Fund management is critical.

The Advantages of Investing in ELSS Mutual Funds

Tax rebate and wealth increase are mutually beneficial

ELSS is the only investment choice that qualifies for tax deductions under Section 80C of the Income Tax Act, 1961 and contributes to wealth accumulation. Due to the ELSS funds’ equity exposure, you can make outstanding returns if you stay invested for at least five years.

The Section 80C choices with the shortest lock-in duration

ELSS mutual funds (MF) have a three-year lock-in period, the shortest of all tax-saving investment alternatives mentioned under section (80C) of the Income Tax Act, 1961. As a result, ELSS mutual funds offer greater liquidity than any other Section 80C investment.

Possibility of earning profits that outperform inflation

The only Section 80C investment choice that has the potential to outperform inflation in ELSS mutual funds. This is what distinguishes ELSS from other tax-advantaged investment alternatives.

Money management expertise

Each mutual fund is managed by a finance professional referred to as a ‘fund manager.’ These are persons who have a proven track record of managing portfolios and hold various finance-related qualifications. Each fund manager is supported by a team of market researchers and analysts who select only the best-performing securities that will benefit investors over time.

Monthly investment option

You can begin investing in the best ELSS funds with as little as Rs 1000 through a systematic investment plan. Plus, there is no restriction on the amount of investment.

Consider the Following Before Investing in ELSS Funds

The following are essential criteria that investors should examine before investing in ELSS mutual funds:

Period of confinement

ELSS mutual funds have a lock-in period as with any other tax-advantaged investment. It is a three-year requirement for ELSS. Premature withdrawals are not permitted. As a result, investors must be ready to stay for a minimum of three years from the date of unit acquisition.

Factor of danger

Due to the equity-oriented nature of ELSS mutual funds, they are inevitably influenced by market movements. Additionally, these funds bear all of the risks associated with equity funds. As a result, investors who invest in ELSS mutual funds must be willing to accept these risks. It is critical to assess your risk profile.

SIP versus lump sum

All mutual funds enable you to invest in one of two ways: either in a flat payment or payment through a Systematic Investment Plan (SIP). Most investors choose the SIP option because they can stagger their commitment over time. Through a SIP, you can invest a small amount regularly. Investing via a SIP is recommended since it delivers the long-term benefit of rupee cost averaging. A lump-sum investment is generally not recommended unless there is a high probability of achieving massive gains.

Taxability of Exchange-Traded ELSS Mutual Funds

Because ELSS mutual funds are a subset of equity funds, they are taxed similarly to equity funds. Dividends paid by these funds are added to your income and taxed according to your tax bracket. Until Budget 2020, investors received tax-free dividends because the fund house was responsible for dividend distribution tax.


Due to the necessary three-year lock-in period, there is no possibility of reaping short-term financial gains. As a result, there is no tax on short-term capital gains on selling fund units in ELSS mutual funds. Capital gains on long-term investments of up to Rs 1 lakh per year are tax-free. With no indexation advantage, any long-term gains over Rs 1 lakh are taxed at a 10% rate.

The Risks Involved With ELSS Funds

Because ELSS mutual funds are equity-oriented, they are subject to the same levels and types of risks as other equity mutual funds. However, these risks can be significantly avoided by investing for a minimum of five years. Additionally, the three-year required lock-in period considerably reduces risk.

This article should give you a good idea about tax-saving mutual funds, tax-free mutual funds, tax-free mutual funds in India, and tax-free MF.