Tax Benefits + High Returns = Tax Saving Mutual Funds (ELSS)


Introduction to ELSS:

Equity Linked Savings Schemes aka ELSS is a type of mutual fund which offers both good returns with tax saving options. One can avail tax deduction u/s 80C up to the amount invested in ELSS or Rs. 1.5 slakh whichever is lower. Hence, ELSS offers best of both worlds i.e. smart tax management with good returns. ELSS is the most popular tax-saving option particularly among young investors who have higher risk apatite than senior citizens. 

Features of ELSS:

Risk Exposure: Major portion of ELSS mutual fund is invested in equity market making it riskier than debt-oriented mutual funds and traditional government-backed tax saving options. Thus, the performance and return of ELSS is positively correlated with equity market directions. On the other hand, we can also expect higher returns than debt-oriented mutual funds and traditional government-backed tax saving options.
Lock in Period: ELSS has a lock in period of 3 years which is much lower than some traditional government-backed tax saving options like PPF, NSC, Tax Saving FDs, Post Office RDs etc. Hence, ELSS provides more liquidity than its counterparts.
Benefit of Dividend and Growth: Apart from tax benefits, investors can also benefit from the dividend and growth options. The investors receive a lump sum amount at the end of lock in period.
Returns: As it is rightly said: "Higher the risk, higher the returns". ELSS are certainly riskier than government-sponsored schemes but, they offer much higher returns in a relatively shorter period of time than their counterparts. ELSS category has offered tax-free returns of around 13.52 per cent in three years, 17.29 per cent in five years, and 9.83 per cent in the 10-year horizon. Other government-backed schemes offer single-digit returns.

How to choose the right ELSS?

Not all ELSS funds are equally rewarding. The purpose of investment should not be only tax benefit but also higher returns. One must bear in mind following things before choosing the ELSS fund

  1. Investment Patterns of the fund manager
  2. Portfolio of the fund
  3. Expense Ratio of the fund
  4. Volatility of the fund in the past


Disadvantages of ELSS Scheme:

Not For Risk-Averse Investors: ELSS is not the right option for risk averse investors. Investors like senior citizen generally do not prefer to take any risk while investing. ELSS is totallyequity based and have high changes of negative returns as well. Hence, risk averse investors should stay away from ELSS. For such investors, the traditional tax saving options are better options.
No Withdrawal Before Lock In Period: Unlike other tax saving options, no part of invested amount is allowed to be withdrawn from ELSS fund before lock in period. Hence, one must plan about liquidity before investing in ELSS funds.

Patters of Investment: One can invest in ELSS in two ways namely "Systematic Investment Plan (SIP)" or lump sum investment

Systematic Investment Plan (SIP): SIP is generally preferred by salaried individuals who wish to invest in smaller amounts over a period of time rather than investing lump sum amount at once. The frequency of investment is usually weekly, monthly or quarterly. in SIP, a fixed sum of money is debited from the investors' bank account and invested in specified fund.

Lump sum Investment: One can also invest lump sum amount in ELSS instead of periodic investment.

Some of the Best ELSS funds:

  1. L&T Tax Advantage Fund
  2. Aditya Birla Sun Life Tax Relief 96
  3. DSP Blackrock Tax Saver Fund
  4. Franklin India Taxshield
  5. Reliance Taxsaver
  6. Axis Long Term Equity Fund

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Financial Management