What Is ELSS Mutual Funds - Features, Why And How To Invest: Money Matters

What Are ELSS Mutual Funds?

Equity Linked Savings Scheme or ELSS mutual funds are a type of mutual fund that primarily invests in equities or stocks. These funds come with a lock-in period of 3 years, which means once you invest in an ELSS, you cannot redeem or withdraw your money before this period. They are an ideal option for individuals looking to grow their wealth while saving taxes simultaneously. What makes ELSS different from other tax-saving options like PPF or fixed deposits is its potential for higher returns, thanks to its equity exposure. However, the flip side is that they come with a higher risk, as equity markets can be volatile.

Features of Equity Linked Savings Scheme (ELSS) Mutual Funds

i) Tax Benefits: ELSS funds fall under Section 80C of the Income Tax Act, which allows you to claim a deduction of up to ₹1.5 lakh per financial year. This tax benefit makes it an attractive option for tax planning.

ii) Equity Exposure: These funds predominantly invest in stocks, so they offer growth potential. ELSS funds allocate at least 80% of their portfolio to equity and equity-related investments.

iii) Lock-in Period: ELSS comes with a lock-in period of 3 years. This is the shortest lock-in period among all tax-saving investments.

iv) Diversified Portfolio: ELSS funds usually invest in a mix of large-cap, mid-cap, and small-cap stocks. This diversification helps reduce risks while providing a chance for higher returns.

v) Systematic Investment Plan (SIP): You can invest in ELSS funds via SIPs, which allow you to invest a fixed amount regularly. SIPs make investing easy and affordable, especially for those who don’t have a lump sum to invest at once.

vi) Risk Factor: Since ELSS funds are equity-oriented, they come with inherent market risks. Their performance depends on the stock market, and there could be periods of high volatility. However, the long-term horizon helps smooth out short-term fluctuations. Each company has the flexibility to design its funds in a way that helps minimise risks.

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Why Should You Invest In Equity Linked Savings Scheme (ELSS) Mutual Funds?

If you're looking to save on taxes and also grow your money over the long term, you might want to consider an Equity Linked Savings Scheme (ELSS). This tax-saving mutual fund lets you claim a tax deduction of up to Rs 1.5 lakh each year, helping you save up to ₹46,800 in taxes. ELSS is the only type of mutual fund that offers tax benefits under Section 80C. Since ELSS funds invest in the stock market, they offer a good opportunity for wealth creation, particularly if you stay invested for the long term.

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How To Invest In Equity Linked Savings Scheme (ELSS) Mutual Funds?

You can invest in ELSS just like any other mutual fund. The easiest way is through an online investment account. You can either invest all at once (lump sum) or choose the SIP (Systematic Investment Plan) method, where you invest a fixed amount regularly. ELSS funds offer three options for you to choose from when making your investment.

i) Growth Option

ii) Dividend Option

iii) Dividend Reinvestments Option

ELSS mutual funds can be a good tax-saving tool in your financial planning. Make sure to consult a financial advisor before investing in it.

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