You would have heard from your friends, colleagues, relatives or mutualfund advisors about the benefits of investing in mutual funds. Right from diversifying your portfolio, to ease of investing to serving your financial needs – wealth appreciation or wealth preservation, the benefits of mutual funds are limitless. One such category of mutual funds is ELSS mutual funds which have gained a lot of traction in the past few years. This article aims to serve as an informational guide of ELSS mutual funds.

What is ELSS?

Equity-Linked Savings Scheme are a type of mutual funds that invest a majority of their assets in equity and equity-linked securities. As per SEBI’s (Securities and Exchange Board of India) guidelines, these funds are mandated to invest at least 80% of their total assets is equities. These mutual funds are eligible for deduction under Section 80C. All section 80C investments offer a cumulative tax deduction of up to Rs 1.5 lac per annum. Just like, other tax-saving investments under Section 80C, ELSS funds have too have a lock-in period. However, ELSS mutual funds enjoy the lowest lock-in period at just three years against other tax-saving investments. Other Section 80C investments such as National Savings Certificate (NSC), Fixed Deposits (FD), Senior Citizens Savings Scheme (SCSS), Public Provident Fund (PPF) have a lock-in period of five years, five years, five years, and fifteen years respectively.

Why are ELSS mutual funds excellent investment option?

ELSS mutual funds offer the dual benefits of tax benefits and wealth creation opportunities. Let’s understand these points in detail:

  1. Tax benefits offered by ELSS tax saving mutual funds
    ELSS funds stand out from the regular equity mutual funds in one huge aspect. The regular equity funds do not offer any tax deduction on investment in these investment options. However, ELSS funds offer a tax deduction of up to Rs 1.5 lac per annum. As a result, you, as an investor can save up to Rs 46,800 every year by invested in these tax-saving mutual funds provided that you fall into the highest tax slab. This means that investing in ELSS mutual funds can help you reduce your taxable income which will further decrease the net income tax paid by you. This results into greater take home salary.
    Apart from tax deduction benefits, ELSS funds offer other tax benefits to investors as well. As ELSS funds have a lock-in period of three years, these mutual fund investments are eligible for just long-term capital gains (LTCG) tax. LTCG tax on equity funds are
  2. Capital appreciation opportunities by ELSS funds
    Equity funds are a great way to earn substantial returns over a prolonged period. As ELSS funds invest majority of their portfolio (at least 80% of their assets) in equity-related securities, these funds have huge potential to earn significant returns. Over the past years, ELSS funds have proved their credibility by offering double digit returns to investors when invested for a prolonged duration say seven to ten years or more. Thus, these funds offer wealth creation opportunities to investors.

Though ELSS funds have a lock-in period of just three years, experts recommend staying investing for a prolonged duration of ten years or more to allow these mutual funds to work at their maximum capacity. Experts advise investors to link their long-term investment goals with ELSS funds so that they do not get tempted to exit the markets at the slightest hints of uncertainty and volatility among investors. Happy investing!