Best ELSS Mutual Funds for Tax Saving Investments

Equity

Linked Savings Schemes

ELSS funds score over their traditional counterparts in terms of the superior tax efficiency of their returns, their comparatively shorter lock-in period, and their better odds of helping you create long-term wealth. Any profits that are booked when you redeem your ELSS mutual funds units will be counted as long-term capital gains from equity funds. Since they allocate your money to the stock market, ELSS funds can be a great tool to help you meet your financial goals.

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What is an ELSS Fund?

Simply speaking, ELSS mutual funds are really just diversified equity funds with a three-year lock-in period! Apart from the enforced lock in, ELSS mutual funds differ from regular equity mutual funds in the fact that whatever amount you invest into an ELSS mutual fund in a particular financial year can be deducted from your income (up to the Section 80C limit of Rs. 1.5 Lakhs), while computing your tax bill for the year. In this manner, ELSS mutual funds help you save income tax.

How Do ELSS Mutual Funds Work?

ELSS Mutual Funds are equity oriented, meaning that they pool together investor moneys and invest them in shares of listed companies. Since they are diversified, ELSS Mutual Funds do not stick to a particular market segment or theme. They invest across a broad spectrum of large cap, mid cap and small cap shares. After the mandated lock in period for ELSS Mutual Funds finish, investors are allowed to redeem their units, though it’s strongly advisable to remain invested for 5-7 years or even more.

Popular 80(C) Options Compared

	Lock-in	Returns	Taxability	Risk
Life Insurance (Non-Linked)	5 - 20 years	3.5% - 7.5%	Nil	Low
NSC	5 - 10 years	7.8%	Taxable	Low
PPF	15 years	7.8%	Nil	Low
5 Year Fixed Deposit	5 years	~6.5%	Taxable	Low
ELSS	3 years	12% - 14% (non-guaranteed)	Nil	High

Why are ELSS mutual funds the best tax-saving option?

Shortest Lock-in Period

3 Years

Wealth Creation Potential

22.64% p.a

Category average return between 2012 and 2017

Convenience of SIP'S

Put your tax savings on
auto pilot

Tax Efficiency

Profits Earned are
Tax-Free

Features of ELSS Mutual Funds

The main features of tax saving mutual funds that investors should be aware of are as follows:
• Every investment in an ELSS mutual fund is locked in for a period of three years, and cannot be redeemed even in extraordinary circumstances
• ELSS Mutual Funds invest into equities; hence they can be quite volatile compared to traditional options. It’s very important to understand the risk/reward associated with tax saving mutual funds before investing into them
• There is no limit to the amount you can invest into tax saving mutual funds; however, you will receive a deduction of up to Rs. 1.5 Lakhs in a financial year. Please note that this doesn’t mean that you can save up to Rs. 1.5 Lakhs by investing into ELSS mutual funds – it means that you can deduct up to this amount from your taxable income for the year!

Why Should You Invest in ELSS Tax Saving Mutual Funds?

Despite their growing popularity, lots of investors remain confused about whether they should opt for an ELSS over traditional options like PPF or Tax Saving Fixed Deposits. We believe that if your financial goals are long term, you should definitely go for a tax saving mutual fund! In the long run, the difference between a 7% return and a 12% return can be exponential. As of September, ’22, ELSS as a category has provided investors with 5 year returns exceeding 13% per annum, and this is generally the type of return that tax saving mutual funds have generated for investors over long periods. Hence, we believe that investors with long term goals should aim to get a good understanding of the interplay between risk and reward, and divert their 80C investments to ELSS instead of fixed return options.

How Finedge can Help You to Invest in ELSS Tax Saving Mutual Funds

Seamless Onboarding: Even if you are a first time investor into Mutual Funds, we’ll get your formalities completed in just five minutes!

Goal Based Investing: ELSS investments made through us will not be ad hoc, but rather would be linked to clearly defined financial goals – thereby increasing your chances of maximizing returns from your tax saving mutual funds

Support of an Advisor: We are not a DIY (Do it Yourself) platform, but a DIA (Dreams into Action) platform! We believe that the support of a Financial Advisor is a critical component of your investing journey, and by investing in an ELSS through FinEdge, you’ll be assigned a qualified financial consultant who will co-own your goals and support you on your investing journey at every step!

What Mode Should You Invest in ELSS - SIPs or Lumpsum

We would definitely recommend the SIP mode of investing when it comes to investing into ELSS mutual funds. Unfortunately, most of us make our tax saving mutual fund investments at the end of the financial year, and in one shot. Not only does this put an undue strain on your pocket; it also increases the overall risk of your equity investment. Instead, a Financial Advisor could help you arrive at your 80C “gap” at the start of the financial year, and you could divide this amount by 12 and start an SIP in ELSS Mutual Funds in April itself. This will ensure that your risks get smoothed out through a process known as “Rupee Cost Averaging”.

Achieve Long-term financial goals & save tax with ELSS Mutual Fund

Since ELSS mutual funds are long term investment plans, they are ideally suited for long-term financial goals such as your retirement or a young child’s college education. After all, ELSS mutual funds are really just diversified equity funds, and can therefore form an integral part of your overall financial planning if you map them to specific goals instead of investing into them in an ad hoc manner. It’s a well-known fact that aligning your investments to clearly defined goals increases your chances of investing success, and the same principle applies to ELSS mutual funds as well!

Frequently Asked Questions - ELSS Tax Saving Mutual Funds

Who Can Invest in ELSS Funds?

Resident Indians, NRI’s and PIO’s can invest into ELSS Mutual Funds. To invest into tax saving mutual funds, you must be KYC compliant. With our digital onboarding process, you can complete your KYC formalities in a matter of minutes.

What is the lock-in period in ELSS Mutual Funds?

The stipulated lock in period for ELSS Mutual Funds is three years. Please do bear in mind that each SIP tranche would be counted as a fresh purchase and remain locked in for three years from it’s purchase date.

How much to invest in ELSS Funds?

There’s no limit to the amount you can invest into ELSS Funds – however, the maximum allowed tax deduction is Rs. 1.5 Lakhs (the Section 80C limit). Ideally, you should invest up to Rs. 1 5 Lakhs in ELSS funds and allocate the rest to other diversified equity funds as per your goals.

NPS or ELSS - which is better?

Although NPS is a superior tax saving option compared to a lot of traditional options such as life insurance and PPF, their returns pale in comparison when it comes to ELSS Mutual Funds. Also – NPS enforces restrictions when it comes to maximum equity allocation, making it a suboptimal long-term investment avenue. Hence, tax saving mutual funds score over NPS in the long run. However, you can use ELSS to complete your 80C quota, and then invest a further Rs. 50,000 a year into NPS to avail of an addition deduction under section 80CCD(1B).

PPF or ELSS - which is better?

Although PPF investments are less volatile, their long-term returns can never beat those from ELSS Mutual Funds – and in the long run, the difference between 7% and 12% is more than you can imagine. Hence, ELSS Funds score over PPF as a tax saving avenue.

How ELSS saves tax?

The amount that you invest into an ELSS in a given financial year is deducted from your income for that financial year, and your tax is computed accordingly. In this manner, ELSS Mutual Funds help you save taxes.

Are Equity Linked Savings Schemes Safe?

From a regulatory standpoint, all mutual funds (including ELSS Funds) are extremely safe. Mutual Funds are structured as a trust, with the unit holders as the ultimate beneficiaries of the trust. Having said that, it’s important to know that ELSS Funds invest into stocks, and the stock market can be volatile. What this means is that your fund value could fluctuate in the short term, and your returns will not be linear, unlike those from FD’s and PPF. However, by investing via SIP’s and by holding on for the long term, risks associated with equity investing tend to get smoothed out.

Equity Linked Savings Schemes (ELSS Funds)