What is ELSS & How Does it Work?

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While there are numerous advantages to investing in shares, such investments must be carried out with caution in order to avoid long-term risks and losses. It is a good idea to be familiar with some of the greatest ELSS Funds that may be invested in for this purpose.

What exactly are ELSS Mutual Funds?

Equity Linked Savings Scheme (ELSS) Funds are open-ended equity mutual funds that help you save and grow your money. When practically all equity funds exempt you from paying long-term capital gains tax of 10.4 percent up to Rs.1 lakh, ELSS mutual funds provide tax advantages. As a result, these MF funds are often known as tax-advantaged mutual fund schemes. You can save up to Rs.1.5 lakh in taxes by investing in ELSS, according to Section 80C of the IT (Income Tax) Act.

The only drawback is that the finest ELSS funds have a three-year lock-in period. That means that every ELSS payment you make is subject to a three-year lock-in.

Why Should You Consider Investing in an ELSS Mutual Fund?

ELSS funds provide numerous advantages. The following are the most prevalent reasons for investing in an ELSS fund:

  • The primary motivation to invest in the finest ELSS funds is to save money on taxes. You can get tax breaks by investing in these funds up to Rs. 1.5 lakh, according to Section 80C of the Income Tax Act of 1961.
  • It aids in developing the habit of investing over a longer period of time. Although the other mutual fund schemes offer long-term investments, they do not have a set lock-in time. ELSS mutual funds, on the other hand, require a minimum three-year investment. Furthermore, by investing for a longer period of time, you may be excluded from paying taxes on your earnings.
  • With a longer investment term, you can let your funds grow and then realise the rewards after three years. Because ELSS funds invest in equities, the potential for high returns is greater.
  • You may systematically instil saving habits using ELSS mutual funds. These funds allow you to begin investing as little as Rs.500 every month. This encourages the practise of investing.
  • You may invest in the stock market with the best ELSS funds. Whereas a typical savings account provides a maximum return of 8%, investing these funds allows you to reap the benefits of larger returns.

ELSS Funds to Invest In 2021-2022

As there are numerous options that provide fantastic investing prospects, such as PPF, NSC, and FD, to name a few. The caveat is that the returns on these investments are taxable. This is where ELSS excels, as it provides greater returns that are partially taxable if the gains exceed Rs.10 lakh.

With the end of the fiscal year nearing and equities market responses turning positive, ELSS investments are on the rise. Let’s look at some of the greatest ELSS funds to consider for the next year.

Fund Name Risk 1Y Returns Fund Size(in Cr)
Axis Long Term Equity Fund Very High 94.00% Rs.34235
BNP Paribas Long Term Equity Fund Very High 56.50% Rs.557
BOI AXA Tax Advantage Fund Very High 55.40% Rs.519
Canara Robeco Equity Tax Saver Fund Very High 59.50% Rs.2893
DSP Tax Saver Fund Very High 56.20% Rs.9805
IDFC Tax Advantage (ELSS) Fund Very High 57.60% Rs.3518
Invesco India Tax Plan Fund Very High 49.00% Rs.1898
JM Tax Gain Fund Very High 73.10% Rs.66
Kotak Tax Saver Fund Very High 53.10% Rs.2323
Mahindra Manulife ELSS Kar Bachat Yojana Fund Very High 58.00% Rs.424
Mirae Asset Tax Saver Fund Very High 53.20% Rs.10146
PGIM India Long Term Equity Fund Very High 55.10% Rs.334
Quant Tax Plan Fund Very High 54.50% Rs.487
Union Long Term Equity Fund Very High 42.70% Rs.449
UTI Long Term Equity Fund Very High 61.00% Rs.3046

The list is not exhaustive, and it is advised to conduct extensive research before investing in these funds.

Characteristics of Equity Linked Savings Scheme Funds

The following are some of the primary highlights of ELSS funds:

1. Allocation of Assets:

According to Securities Exchange Board of India (SEBI) standards, 80 percent of the entire corpus under ELSS shall be invested in equity shares.

2. Risk-Reward Proportion:

Because the major investments are in stocks, the risk ratio associated with ELSS funds is exceptionally high. In addition to high risk, bigger profits are obtained as compared to alternative investment options such as FDs or debt funds.

Things to Consider When Investing in ELSS

Here are some crucial considerations to bear in mind before investing in Equity Linked Savings Scheme funds:

  • The investor’s ultimate financial goal
  • The investing time horizon
  • Risk should be taken in accordance with the investor’s risk tolerance.
  • The expense ratio of funds varies from one to the next.
  • Past performance of the fund should also be considered.
  • A fund manager also plays a vital role. The past performance of the fund management should be extensively investigated.

Pros of Investing in ELSS

ELSS funds provide additional benefits in addition to tax advantages, such as:

  • You can gain from long-term investment.
  • Increased capital gains
  • It provides an opportunity to participate in shares.

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