Last Updated on Aug 9, 2023 by Harshit Singh
At the end of every financial year, most investors rush to find ways to save tax. One of the ways you can save Rs. 1,50,000 in tax is through ELSS mutual funds. These tax-saving mutual funds offer dual benefits of wealth creation through equity exposure and tax saving under Section 80C. To know more about ELSS funds and how to invest in ELSS funds, read on.
Table of Contents
What are ELSS funds?
ELSS (Equity-Linked Savings Scheme) funds, popular as tax-saving mutual funds, are professionally run funds that focus primarily on equity and equity-linked securities to generate returns for the investors. A 60-80% of its portfolio is invested in diversified equity and related securities, and the remaining may have exposure to fixed-income securities.
ELSS funds are the only funds with tax deduction benefits that help investors to save on taxes under the Section 80C of the Income Tax Act, 1961. Among all Sec 80C investments used for tax savings, ELSS funds are the only investment with the least lock-in period of three years.
Investors can gain from ELSS funds by investing a lump sum amount or invest via a Systematic Investment Plan (SIP) that offers the additional benefit of cost averaging.
Types of ELSS funds
ELSS funds are classified into three categories:
- Dividend payout funds or Income Distribution cum Capital Withdrawal (IDCW) plans where investors receive tax-free dividends. These funds invest primarily in companies having the potential to give dividend payout consistently.
- Dividend reinvestment funds or reinvestment of IDCW plans where returns or dividends are declared but instead of paying to investors, the dividends get reinvested as a new investment.
- Growth Funds where the investor can realise the full value of the fund at the time of redemption.
How to invest in ELSS funds?
To invest in ELSS mutual funds,
Step #1 – Open ‘Tickertape Mutual Fund Screener’
Step #2 – Go to ‘Category’ and select ‘Equity’
Step #3 – Under ‘Equity’ select ‘Equity Linked Saving Schemes’
List of ELSS schemes in India
Among the list of 59 listed ELSS schemes, pick the one that suits your financial needs and invest through your broking account.
Advantages of investing in ELSS fund
ELSS funds are one of the most preferred investments among all Section 80C investments because of the following advantages:
- Tax benefit – ELSS funds are the only tax-saving funds with the potential of providing inflation-beating returns as it invests in equity and equity-related securities.
- Wealth creation – It offers dual advantages of tax deductions and exemption besides wealth creation.
- Long-term investment: It is suitable for an investor with a long-term investment horizon as well as short-term as it is a fund with a lock-in period of just three years.
- No entry or exit load – The investment does not involve entry and exit loads.
- Minimum investment required – Investors need not accumulate funds to start investing in an ELSS fund. Start investing with a small amount, as low as Rs. 500 in some funds. The minimum amount for investing varies from fund to fund.
- Dedicated fund managers – Superior fund management is a part of the ELSS world where fund managers perform thorough research for long-term strategic decisions in addition to analyzing market-wide trends to provide higher actual returns than expected by investors.
Conclusion
ELSS funds are a popular tax-saving tool aimed at maximising capital appreciation over the long term through investment in equity and equity-related securities. ELSS funds offer the dual benefit of tax saving up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, as well as provide exposure to the equity market to generate potentially higher returns than other tax saving instruments. ELSS funds have the shortest lock-in period of 3 years.
