Best ELSS Funds
About ELSS Mutual Funds
ELSS or Equity-Linked Savings Schemes are mutual funds that invest primarily in equities or equity-related products. 80% of their investments must be invested in equities, and the lock-in period is 3 years.
These tend to be open-ended funds that make a fair bit of returns. But most importantly, they qualify for a lot of tax deductions under Section 80C of the Income Tax Act, 1961.
Investment portfolio-wise, ELSS are just like any other equity fund as the exact amount and proportion of investment in companies and sectors differ from fund to fund based on the preference of the fund manager.
The dividends earned in ELSS may either be reinvested (under the growth option) or given to the investors (under the dividend option).
How do ELSS Funds work?
Equity-linked Savings Schemes or ELSS Funds fall within the category of mutual funds that invest your capital mainly in equity or equity-related instruments. ELSS funds are referred to as open-ended funds that have the potential to yield a fair degree of returns if invested in. In terms of the investment portfolio of ELSS funds, these funds primarily invest in equity, with fund managers actively investing your capital in sectors and companies that may bring you the best potential returns.
ELSS funds invest in the equity of companies and investors can benefit from dividends through such funds too. These may be re-invested (under the option of Growth Funds or distributed among investors (under the option of Dividend Funds). ELSS funds have a lock-in period of 3 years. Additionally, it is important to note that they qualify you for tax deductions under Section 80C of the Indian Income Tax Act of 1961.
Features of ELSS Mutual Funds
- Although their returns may seem less compared to small cap funds, they seem high when compared to other tax-saving instruments such as the Public Provident Fund, National Pension Scheme, etc.
- Investing in ELSS funds can lower the taxable income of an individual or a HUF by up to Rs. 1.5 lakh. This means if you invest up to Rs. 1.5 lakh in a year in an ELSS, then you can claim tax rebates worth up to Rs. 46,800 in that year (as that Rs. 150,000 is deducted from your taxable income). However, investments over and above Rs. 150,000 do not count for a tax deduction.
- ELSS schemes have a focus on equity investments, but they may also have minor investments in debt.
- One can invest in ELSS both through SIP (systematic investment plan) or in a lump sum.
- ELSS funds tend to have a lock-in period of roughly 3 years.
Advantages of ELSS Mutual Funds
The following are some of the advantages of ELSS mutual funds –
- Tax saving – It is an excellent tool for retail investors to save a large portion of their income from being taxed and additionally earn far higher returns from deploying the money than in a savings account.
- Short lock-in period – Compared to provident funds and pension funds, ELSS mutual funds have a relatively shorter lock-in period of 3 years (there may be some equity or debt funds though which may have a lower lock-in period than ELSS funds).
- Higher returns – Again, compared to provident funds or pension funds or even post office saving schemes, the returns of ELSS mutual funds can be higher, especially if they are some of the best ELSS funds. This is because they play with high-risk, high-return investment avenues like equity.
Overall, ELSS mutual funds can be a great way to induce the retail, salaried investors of India to start investing in the market, thereby channeling idle funds into the equity market.
Risk of ELSS Mutual Funds
- The risks associated with even some of the best ELSS mutual funds are pretty much the same as the risks associated with equity mutual funds which are the following –
- Market risk – This is the risk that the price of the securities or stocks invested in by the fund may drop, thereby putting the investor’s funds at risk. This happens especially during the time of general economic downturns like recessions when entire sectors (and thus multiple companies in the fund’s portfolio) experience a downturn together.
- Liquidity Risk – This is the risk not being able to buy or sell stocks at the right time due to a lack of sellers or buyers of adequate volumes respectively. Therefore, if a fund invests extensively in stocks which are not liquid, then it might be a problem.
- There may be further risks too – e.g. if the fund invests primarily in small cap companies instead of a more balanced portfolio, then the risk of capital loss becomes even higher.
Factors to Consider Before Investing in ELSS Funds
ELSS funds have features and advantages that may tempt you into investing in them. While such factors must be considered before you invest, there are other variables to be aware of before you invest. Consider the following before you invest in ELSS funds:
- While ELSS funds may yield potential tax benefits for you as an investor, you should be aware that they invest in equities and instruments related to equities. Given this, they may potentially be subject to risks that market exposure results in (like volatility and shifts in prices).
- While deciding on any investment, you should consider your own risk profile and your personal financial needs. If the tax benefits can help you, then these funds may be considered. Additionally, if you have a high tolerance for risk and can withstand equity investment fluctuations, you may consider ELSS funds. Furthermore, ELSS funds may be potentially productive for investors looking to yield returns in the long run.
- ELSS funds come with a lock-in duration that lasts for 3 years. This means that if you wish to exit the fund before this time limit, you will not be able to do so. On the other hand, if you want the potentially positive effects of compounding returns, ELSS funds may be a good bet for investment. You may also want to consider the fact that compared to other tax-saving investment instruments like PPF and NSC, ELSS funds offer the least amount of a lock-in period.
- Since ELSS funds allocate the majority of an investor’s capital to equity, it is important that you check on the asset allocation of the ELSS fund you opt for. This is why there are categories of ELSS funds to choose from, like high-risk funds that invest your capital in mainly small-caps, and medium-risk ELSS funds that invest in large-caps.
Who Should Invest in ELSS Mutual Funds?
ELSS mutual funds save taxes up to Rs. 46,800 per year, are riskier than investments in fixed deposits or National Pension Scheme, but give returns that can vary a lot – from negative returns to even 30% returns or above per year. Basically, the risk and return profile of ELSS funds is similar to that of any other equity fund.
Therefore, individuals and Hindu Undivided Family (HUFs) who are risk-taking and knowledgeable enough to invest in an equity fund but would also appreciate a tax deduction of up to Rs. 1.5 lakh per year are best suited to invest in ELSS mutual funds. It would also help if the investor is reasonably confident of the portfolio in order to stay invested despite minor, temporary downturns.
Taxability of ELSS Mutual Funds
- ELSS mutual funds give two types of income streams to their investors – dividends and capital gains, both of which are taxed.
- Dividend taxation – When an investor earns dividends on their ELSS mutual fund, the dividends are considered as a part of their taxable income and are subject to taxation at the applicable rate based on their income tax bracket. Also, there is a 10% TDS on the dividend amount if it exceeds Rs. 5000 in a financial year.
- Capital gains taxation – Since the minimum lock-in period of ELSS is 3 years, all capital gains taxed are long-term. Money obtained above Rs. 1 lakh from the redemption of ELSS units is taxed at a 10% LTCG tax rate.
How to invest in ELSS Funds?
Investing in the ELSS Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine an ELSS fund that suits your needs and risk profile. You can learn more about each ELSS fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the ELSS fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Best ELSS Mutual Funds
|Name of the fund||AUM (in Rs. crore)||Minimum Investment Amount (in Rs.)||3Y CAGR (%)||5Y CAGR (%)|
|Quant Tax Plan Direct Growth||3198||500||46.09||22.95|
|SBI Tax Advantage Fund III||28||–||37.23||22.32|
|SBI LT Advantage Fund IV||161||–||40.83||19.40|
|Mirae Asset Tax Saver Fund Direct Plan Growth||14,448||500||30.56||15.27|
|Canara Robeco Equity Tax Saver||4,923||500||26.57||15.12|
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR, which is subject to change frequently. Check out the real-time data on Angel One.
Quant Tax Plan Direct Growth
- It is fairly diversified in terms of the sector (financial sector being the largest), but its top 5 investments occupy 40% of its corpus. The top 3 companies in its portfolio are ITC, Reliance Industries, and HDFC Bank. The fund has an expense ratio of 0.57% and zero exit load.
SBI Tax Advantage Fund III Growth
- The fund has a lock-in period of 3 years and no exit load whatsoever. Roughly 94% of its investments are in equity, with its top holdings being ICICI Bank Ltd, Blue Star India and SBI. These three funds constitute a little over 18% of the portfolio. Roughly a quarter of the investments are in the banking and financial sectors.
SBI Long Term Advantage Fund IV Growth
- The fund does not have any exit load, but it has a 3 year lock-in period like all other ELSS mutual funds. The top investments made by this fund are in ICICI Bank, SBI and HDFC Bank which together make up about 23% of the total investment corpus.
Mirae Asset Tax Saver Fund Direct Plan Growth
- This fund, established in November 2015, has an expense ratio of 0.65% and no exit load. However, the fund has a 3-year lock-in period. Its top three stock investments (namely HDFC, ICICI Bank and Reliance Industries) constitute over 22% of its total corpus of investments.
Canara Robeco Equity Tax Saver Fund Direct Plan Growth
- This fund has an expense ratio of 0.69% and no exit load. However, the fund has a 3-year lock-in period. It is a fairly old fund established in January 2013. Its top three investments are in HDFC Bank, ICICI Bank and Infosys.