ELSS Mutual Funds are a versatile tool for tax-saving and wealth creation in financial planning. Understanding how they work can empower investors to make informed decisions with their money. So, let’s break down everything about ELSS Mutual Funds, from what they are to how to make the most of them.
What is ELSS Mutual Fund?
ELSS, or Equity Linked Savings Scheme, is a category of mutual funds that primarily invests in equity and equity-related instruments. These funds offer the potential for high returns and provide tax benefits under Section 80C of the Income Tax Act, making them a popular choice among investors.
List of ELSS Mutual Funds in India
Below are the top-performing ELSS mutual funds that you can consider investing in:
| ELSS Mutual Funds Scheme | NAV (Rs) | Rating | Expense Ratio(%) |
| Quant ELSS Tax Saver Fund (IDCW) | 54.52 | 5 | 1.75 |
| Quant ELSS Tax Saver Fund (G) | 392.61 | 5 | 1.75 |
| Kotak ELSS Tax Saver Fund (IDCW) | 42.83 | 5 | 1.76 |
| Kotak ELSS Tax Saver Fund (G) | 114.44 | 5 | 1.76 |
| Mirae ELSS Tax Saver Fund-Reg (G) | 44.66 | 5 | 1.58 |
| Mirae ELSS Tax Saver Fund-Reg (IDCW) | 25.48 | 5 | 1.58 |
| Canara Rob ELSS Tax Saver-Reg (IDCW) | 48.49 | 4 | 1.7 |
How ELSS Mutual Funds Work?
ELSS funds pool money from investors and invest primarily in equity and equity-related instruments. These funds come with a lock-in period of three years, during which investors cannot redeem their units. The invested amount qualifies for tax deduction up to Rs. 1.5 lakhs under Section 80C, making ELSS a tax-efficient investment avenue.
On an easier note, ELSS Mutual Funds work kind of like a big pot where lots of people put their money. This pot is managed by experts who invest the money mainly in stocks or shares of companies. Here’s the catch: once you put your money in this pot, you can’t take it out for a few years. But the good news is, when you put your money in this pot, you get a special benefit – you pay less tax! This means you save money on taxes while your money grows over time. So, ELSS Mutual Funds help you save taxes and grow your money by investing in stocks for a certain period.
Who Should Invest in ELSS Funds?
ELSS Funds are great for people who want to save taxes and grow their money over the long run. If you’re someone who doesn’t mind taking a bit of risk with your investments and can leave your money untouched for a few years, ELSS Funds might be a good fit for you. They’re especially suitable for folks who have some extra money to invest and want to see it grow while also getting tax benefits.
Factors to Considered Before Investing in ELSS Funds
When you’re thinking about putting your money into ELSS Funds, there are a few things you should keep in mind to make sure you’re making a smart choice:
1. Performance: Check how well the ELSS Fund has been doing in the past. Look at its track record to see if it’s been making money consistently.
2. Fund Manager’s Track Record: The person managing the fund plays a big role in its success. Check out how long the fund manager has been doing their job and how well they’ve done it in the past to get an idea of how good they are at it.
3. Expense Ratio: This is the fee you pay to the fund house for managing your money. Lower expense ratios mean more of your money goes into investments, so looking for funds with lower fees is good.
4. Investment Objective: Different ELSS Funds have different goals, like focusing on certain sectors or companies. Make sure the fund’s goals match yours.
5. Risk Profile: Consider how much risk you’re comfortable with. ELSS Funds invest in stocks which can be volatile. If you’re okay with some ups and downs, you might go for higher-risk funds for potentially higher returns.
Risks Involved While Investing in ELSS Funds
When you’re putting your money into ELSS Funds, it’s important to know that there are some risks involved. Here are a few you should be aware of:
Market Risk: Since ELSS Funds invest in stocks, they’re affected by the stock market’s performance. If the market goes down, the value of your investment might go down, too.
Liquidity Risk: ELSS Funds have a lock-in period, which means you can’t take your money out for a few years. So, if you suddenly need that money, you won’t be able to access it until the lock-in period is over.
Concentration Risk: Some ELSS Funds might focus on specific sectors or companies. If those sectors or companies don’t perform well, it could affect the fund’s performance.
By understanding these risks, you can make informed decisions about whether ELSS Funds are the right choice for you and how to manage those risks effectively.
How to Invest in ELSS Funds
Investing in ELSS Funds is a straightforward process that can be done through various channels. Here’s how you can do it:
Step 1: Choose a Fund:
Research and select an ELSS Fund based on:
- Investment goals
- Risk tolerance
- Financial objectives
- Past performance
- Fund manager expertise
- Investment objective
- Expense ratio
Step 2: Complete KYC:
Submit identity proof, address proof, and other relevant documents.
Step 3: Select Investment Mode:
Decide between a lump-sum investment or a Systematic Investment Plan (SIP).
Step 4: Choose Investment Platform:
Options include:
- Fund house website or office
- Online investment platforms
- Mobile apps from banks, mutual fund houses, or third-party platforms
Step 5: Initiate Investment:
Follow the instructions to provide:
- Investment amount
- Investment mode (lump sum or SIP)
- Payment details
Step 6: Monitor and Review:
- Regularly track fund performance
- Review investment objectives
- Make adjustments as needed to stay aligned with financial goals
ELSS vs. Other Tax-saving Instruments
Unlike traditional tax-saving instruments like PPF (Public Provident Fund) and NSC (National Savings Certificate), ELSS funds offer the dual advantage of potential wealth creation and tax savings. Comparing ELSS with other tax-saving options helps investors make an optimised decision based on their financial goals and risk appetite.
Tips for Maximising Returns with ELSS
To maximise returns with ELSS Funds and make the most of your investment, consider the following tips:
| Tips for Maximizing Returns with ELSS | Description |
| Invest for the Long Term | ELSS Funds work best with long-term investments. Avoid frequent trading to minimise costs and leverage compounding. |
| Utilise SIPs for Rupee-Cost Averaging | SIPs involve regular investments, lowering the average cost per unit by buying more when prices are low and fewer when prices are high. |
| Rebalance Portfolio Regularly | Periodically adjust your asset allocation to maintain your desired risk level and goals. |
| Monitor Fund Performance | Regularly track ELSS Fund performance. Switch funds if consistently underperforming. |
| Stay Informed | Keep up with market trends, economic indicators, and tax law changes affecting ELSS investments. |
| Consider Tax Implications | Consider the tax implications of capital gains, dividends, and the lock-in period in your tax planning. |
Conclusion
Investing in ELSS Funds offers tax benefits and long-term growth potential. Understanding fundamentals, considering performance and risks, and utilising SIPs are key. Monitoring investments and staying informed are crucial. ELSS outshines other tax-saving options. By following tips and understanding tax implications, investors can maximise returns and achieve financial goals.
FAQs
Ans: ELSS Funds are ideal for investors seeking tax benefits and long-term wealth growth. However, those with a low-risk tolerance or short investment horizon may prefer other options.
Ans: Consider factors like past performance, fund manager expertise, expense ratio, and investment objective. Align your investment choice with your risk tolerance and financial goals.
Ans: No, ELSS Funds have a lock-in period of three years. Withdrawals before this period are not permitted, so investors need to plan for liquidity accordingly.
Ans: Investments in ELSS Funds qualify for tax deductions under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs annually. Additionally, capital gains on redemption are subject to taxation, so investors should be aware of these implications.
