ELSS (Equity Linked Savings Scheme) Mutual funds are a type of mutual fund that primarily invests in equity and equity-related instruments (more than 80%) and also offers tax savings with the lowest lock-in period.
Lock-in Period
ELSS funds have a mandatory lock-in period of three years, which is the shortest among all tax-saving instruments under Section 80C. This lock-in period means that once you invest in an ELSS, you cannot redeem your investment before the three-year period is over. However, among all investments with tax benefit u/s 80C, ELSS is the only pure growth-oriented investment (most others are fixed return instruments) and has the lowest lock-in period (3 years). The potential for higher returns due to equity exposure makes ELSS a popular choice for long-term wealth creation and tax planning.
Investment Flexibility
Investing in ELSS mutual funds can be done both as lump sum and as Systematic Investment Plan (SIP). Investing through SIP enables the investor to invest smaller amounts every month (periodically) and also get the added benefit of averaging the cost of investment and reducing market timing risk.
Tax Benefits
ELSS funds are unique because they offer the dual benefits of capital appreciation through equity investments and tax savings under Section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to ₹1.5 lakh in a financial year by investing in these funds. i.e., investments in ELSS can reduce taxable income by up to ₹1.5 lakhs in a financial year. However, long-Term Capital Gains (LTCG) tax is applicable on ELSS returns in accordance with applicable tax laws on LTCG tax on gains from equity investment.
Potential Returns
Historical performance of ELSS funds shows that they have delivered higher returns compared to traditional tax-saving options. 29.05% and 12.16% are the highest and the lowest annualized returns generated by ELSS funds in the last 10 years (as on 04-Aug-2024), with a category average return of 21.59%. But remember that returns from equity investments are not guaranteed and past returns are not necessarily indicative of future returns.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes. Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax, and financial implications of the investment/participation in the scheme.
Comparing ELSS with Other Tax-Saving Instruments
PPF is a guaranteed return savings scheme established by the Govt. of India with maximum permissible investment limit of 1.5 Lakhs in financial year and is eligible for a tax benefit under 80C of income tax act. PPF is a 15-year maturity product. Let us compare the returns of PPF with ELSS in the last 15 years.
Consider 1,50,000 has been invested every year for 15 years through a monthly investment of 12,500
| Investment | Current value | CAGR* | |
|---|---|---|---|
| PPF | 22,50,000 | 42,42,838 | 8.17% |
| Best performing ELSS | 22,50,000 | 1,37,99,375 | 21.47% |
| Worst performing ELSS | 22,50,000 | 68,65,325 | 13.69% |
| Average of all ELSS | 22,50,000 | 87,68,917 | 16.45% |
Selecting the right ELSS mutual fund
Choosing an ELSS fund like any other mutual fund depends on many factors, such as past performance, fund manager expertise, risk ratios, performance consistency, and investment strategy of the fund to name a few. It is always better to reach out to an expert (an investment advisor or a mutual fund distributor) for selecting the right funds for you in alignment with your personal financial goals.
Conclusion
Market-linked returns and long-term investment strategies are significant for creating wealth. Investment returns from mutual funds heavily depends on the time you stay invested with discipline. Even if you are not availing 80C benefit under the new tax regime, this forced lock-in feature of ELSS increases your chances of better returns.
ELSS mutual funds are ideal for investors looking to save taxes u/s 80C while aiming for better returns through equity investments, with the added benefit of a relatively short lock-in period.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute professional advice. While full efforts have been made to ensure the accuracy of data and numbers, no responsibility is taken for any errors or omissions. Tax implications on insurance, investments and returns from related products may change due to updates in tax laws. Always consult with your financial advisor or insurance expert before making any investment or insurance decisions. The author is not responsible for any financial losses or damages incurred as a result of relying on the information in this blog.
