Best ELSS Mutual Funds
Equity Linked Savings Schemes (ELSS) are one of the best ways to save on taxes while investing in the stock market. These funds offer tax benefits and the potential for wealth creation over the long term. With a lock-in period of three years, ELSS mutual funds are ideal for individuals seeking a combination of tax savings and capital growth.
What is ELSS Mutual Fund?
An ELSS mutual fund is an equity mutual fund offering the dual benefits of tax savings and potential market-linked returns. ELSS funds invest most of the corpus in equity and equity-related instruments and offer tax deductions under Section 80C of the Income Tax Act. Hence, investors can claim tax deductions of up to ₹1.5 lakh per financial year. ELSS has a 3-year lock-in period, the shortest among all tax-saving investment options.
Features of ELSS Mutual Fund
ELSS mutual funds have several features that set them apart from other mutual funds:
- The 3-year lock-in period is the shortest among tax-saving schemes.
- ELSS funds invest up to 80% of the amount in equity.
- Since these funds are equity-oriented, they can offer higher returns over the long term but with associated risks.
How ELSS Mutual Funds Work?
ELSS mutual funds pool money from multiple investors and invest predominantly in stocks of various companies. Fund managers use their expertise to allocate funds across different sectors and market capitalisations to maximise returns. The 3-year lock-in period means you can only withdraw your money after this tenure. However, investors can stay invested after the lock-in ends to continue benefiting from market growth.
Example:
If you invest ₹1 lakh in an ELSS fund and the fund grows at an annualised rate of 12%, your investment could grow to around ₹1.40 lakh after three years.
List of ELSS Mutual Funds in India
Here’s a list of some of the best-performing ELSS mutual funds in India based on past performance and fund management:
Who Should Invest in ELSS Funds?
ELSS mutual funds are ideal for:
- First-time Investors: Those looking to enter the equity markets while enjoying tax benefits.
- Taxpayers: Anyone aiming to reduce their tax liability under Section 80C.
- Long-term Investors: Individuals with a minimum 3-year investment horizon seeking high returns.
- Moderate to High-Risk Takers: Investors who are comfortable with the stock market's volatility.
Example: If you're in the 30% tax bracket and invest ₹1.5 lakh in an ELSS fund, you can save the taxes up to ₹46,800.
How to Invest in ELSS Funds?
Investing in ELSS mutual funds is easy and can be done through various methods:
- Online Platforms: Most mutual fund houses and third-party platforms offer online investments in ELSS funds.
- SIP (Systematic Investment Plan): Start investing with as little as ₹500 per month.
- Lump-sum Investment: You can invest a one-time amount, but SIPs provide the advantage of rupee cost averaging.
Taxation on ELSS Funds
Although ELSS investments offer tax savings under Section 80C, the returns are subject to taxation. Gains earned up to ₹1 lakh in a financial year are tax-free. However, gains above ₹1 lakh are taxed 10% as long-term capital gains (LTCG).
Example:
If your total gains from ELSS are ₹1.2 lakh in a year, you will pay 10% LTCG tax on ₹20,000, which amounts to ₹2,000.
Hence, ELSS mutual funds are a fantastic option for those who are looking to grow their wealth while saving on taxes. They offer a well-rounded investment opportunity with a short lock-in period, the potential for high returns, and tax benefits. However, as they are equity-based, they carry market risks, so it's essential to assess your risk tolerance before investing.
By selecting the right ELSS mutual fund, you can enjoy the dual benefits of tax savings and wealth creation.
