In this article we cover
1) What is an ELSS fund?
2) What Are the Features of ELSS Mutual Funds?
3) How Do ELSS Mutual funds work?
4) What are the types of Investment Options in ELSS Mutual Funds?
5) How Are ELSS Mutual Funds Taxed?
6) How to Invest in ELSS Funds?
7) Things to Consider While Investing in ELSS Mutual Funds
8) ELSS Funds vs Traditional Tax Saving Options
9) AUM Size of ELSS Mutual Funds
What is an ELSS fund?
Imagine, if you could eat an entire tub of ice-cream and instead of gaining weight, lose 1.5 kilograms!
We know that this is not possible in real life. But in mutual funds, there is a scheme that will help you generate higher returns and also save tax!
Yes, this magical scheme is Equity Linked Savings Scheme (ELSS). It is a unique mutual fund scheme that offers dual benefit of higher returns and tax saving…eat lots of ice cream and still lose weight.
ELSS funds help save tax under section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to ₹ 1.5 Lakhs by investing in ELSS funds. ELSS funds are also known as tax saving funds or tax saver funds since they help save tax.
ELSS funds pool money from several investors.
mutual funds Mutual Funds
Mutual Funds pool money from various investors and invest in asset classes such as equity, debt, gold etc. Mutual Funds can be actively managed or passively managed. Equity, Debt, Hybrid, Gold & Solution oriented funds are the 5 major types of mutual funds in India.Read More invest this money in equities. Since they invest in stocks, they generate higher returns than traditional tax saving options like 5-year Tax Saving FD, Insurance policies etc. But like equity funds, ELSS funds are volatile in nature and do not provide guaranteed returns like a 5-year tax saving bank deposit.
What Are the Features of ELSS Mutual Funds?
The key features of ELSS funds include:
- ELSS mutual funds invest up to 80% of its corpus in equity and equity related instruments.
- ELSS mutual funds have a lock in period of 3 years.
- ELSS funds provide dual benefits of tax-saving along with capital appreciation.
- ELSS funds offer both growth & dividend options. Investors who want capital appreciation can opt for growth options. Investors who want a regular source of income can opt for a dividend payout option.
- ELSS mutual funds do not have any entry or exit loads.
How Do ELSS mutual funds work?
ELSS funds invest across market cap. While ELSS funds are locked in for 3 years, their value keeps on changing everyday as per the market’s movements.
ELSS funds are also actively managed by expert fund managers. These fund managers take investment decisions on behalf of the investors.
What are the types of Investment Options in ELSS Funds?
ELSS mutual funds have 2 types of investment options just like equity mutual funds.
- Growth option - Gains or income generated by the fund is reinvested back in the fund itself. This reinvested amount compounds and generates higher returns in the long period. Growth option is suitable for investors who aim for long term wealth creation.
- Dividend option - Income generated by the fund is distributed in the form of dividends. Investors receive dividends as per their chosen frequency - daily, weekly, monthly, quarterly, half-yearly or annually.
Dividends received from ELSS funds are taxable in the hands of the investors. Dividend option is perfect for investors who want a regular source of income. But remember, it is not compulsory for ELSS funds to declare dividends. If a fund has not made enough profits in a particular year, then it can avoid declaring dividends.
How Are ELSS Mutual Funds Taxed?
Since they cannot be sold before 3 years, ELSS funds qualify for long term capital gains tax. So, if your ELSS gains exceed Rs 1 Lakh in a financial year, then the gains will be taxed at 10%.
How to Invest in ELSS Funds?
You can invest in ELSS funds via a SIP (systematic investment plan), lump sum or SmartSIP. Investing in ELSS funds through SmartSIP helps achieve higher returns than a normal SIP since it considers the market volatility and also through the power of compounding.
If you have surplus cash, then you can invest as lumpsum in ELSS funds. But, you should do so at the start of the financial year i.e., April rather than at the last minute. This way, your investment amount generates returns for the entire 12-month period.
Things to Consider While Investing in ELSS Mutual Funds
Fund’s Investment Objective: Make sure your financial goals are in line with the fund’s investment objective. You should invest in ELSS funds only if your goal is to save tax. If your 1.5 Lakh 80C limit is completed, then you should opt for diversified equity mutual funds.
Risk Factor: Try to match your risk profile with the fund’s risk level. ELSS funds are risky. ELSS funds that invest in mid cap stocks carry higher risks. So, if you are a low-risk investor then you should invest in large-cap dominated ELSS funds.
You can check the risk profile of the fund using the riskometer available on the RankMF. Since ELSS funds are locked in for 3 years, you should select an ELSS fund which is in line with your risk profile.
Investment Period: ELSS mutual funds are ideal for long term wealth creation. Investors with a less than 3 years investment period should not invest in ELSS mutual funds. When investing in ELSS funds, investors should have a minimum time horizon of 5 years.
ELSS Funds vs Traditional Tax Saving Options
In recent years, ELSS funds have become the preferred tax saving option for retail investors. ELSS funds carry the shortest lock-in period compared to PPF’s - 15 years, Bank Deposit & National Savings Certificate’s - 5 years.
Additionally, ELSS funds have generated an average return of 13.78% in the last 5 years. This 13.78% average return is much superior to 7-8% generated by traditional tax saving options.
To save tax and reap superior returns, invest in the best ELSS funds through RankMF. Open a free mutual fund investment account with RankMF - India’s best mutual fund research & investment platform & start saving tax with the best ELSS funds today!
AUM Size of ELSS Mutual Funds
- Open ended ELSS funds: ₹119,348.96 (in crores)
- Close-end ELSS funds: ₹4865.33 (in crores)
Hence the total AUM of ELSS funds is ₹124,214.29 (in crores)
(Note: Source of the data is AMFI. Calculated as of date 15th January 2021)
Read a detailed article about the advantages & disadvantages of ELSS mutual funds.
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The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent., RankMF | Last Update 30 March 2021