Tax saving mutual funds , commonly known as Equity Linked Savings Schemes (ELSS), offer investors a dual benefit of tax savings and potential wealth creation. These funds primarily invest in equity markets and come with a lock-in period of three years, offering tax deductions under Section 80C of the Income Tax Act, 1961, making them a popular choice among investors in India seeking tax-efficient investment avenues.
What are Tax Saving Mutual Funds (ELSS)?
Tax saving mutual funds or ELSS are diversified equity funds that invest predominantly in equities and equity-related instruments. They come with a mandatory lock-in period of three years, which is the shortest among all tax-saving instruments under Section 80C.
Top Tax Saving Mutual Funds in India (2024)
- Quant Tax Plan Direct-Growth
- Bandhan Tax Advantage (ELSS) Fund
- SBI Long Term Equity Fund
- Bank of India Tax Advantage Fund
- Canara Robeco Equity Tax Saver Fund
- Mahindra Manulife ELSS Fund
- PGIM India ELSS Tax Saver Fund
- Kotak ELSS Tax Saver Fund
- Motilal Oswal ELSS Tax Saver Fund
- Franklin India Taxshield Fund
Each of these funds has its investment strategy, risk profile, and historical performance. It’s essential to conduct thorough research or consult a financial advisor to choose the one aligning with your financial goals and risk tolerance.
How Tax Saving Mutual Funds Work
ELSS funds primarily invest in equities and equity-related instruments, aiming for capital appreciation. They follow diverse investment strategies based on the fund manager’s discretion and market conditions. The mandatory lock-in period of three years ensures a disciplined investment approach while offering tax benefits.
Benefits of Tax Saving Mutual Funds
- Tax Benefits: Investments up to ₹1.5 lakh in ELSS are eligible for tax deductions under Section 80C.
- Potential Returns: Being equity-oriented, ELSS has the potential for higher returns compared to traditional tax-saving instruments.
- Short Lock-in Period: Three years lock-in is shorter compared to other tax-saving options like PPF or NSC.
- Diversification: ELSS invests across sectors, reducing risk through diversification.
Who Should Invest in Tax Saving Mutual Funds ?
- Tax Savers: Individuals looking to save taxes under Section 80C can consider ELSS.
- Long-Term Investors: Those willing to stay invested for at least three years to benefit from potential capital appreciation.
- Risk-Tolerant Investors: ELSS, being equity-oriented, carries market risks; hence, investors should be willing to bear market fluctuations.
Things To Consider Before Investing in Tax Saving Mutual Funds
- Risk Profile: Assess your risk tolerance as ELSS involves market risks.
- Fund Performance: Historical performance, fund manager’s track record, and consistency matter.
- Lock-in Period: ELSS comes with a mandatory lock-in of three years.
- Financial Goals: Ensure ELSS aligns with your financial objectives and investment horizon.
Before investing, conduct thorough research, consider your financial goals, risk appetite, and consult a financial advisor if necessary. ELSS serves as a tax-saving tool while offering the potential for wealth creation over the long term.
ELSS funds primarily invest a substantial portion (at least 80%) of their assets in equity and equity-related instruments. These can include stocks across various market capitalizations and sectors, along with some debt instruments.
One of the defining features of ELSS is the mandatory lock-in period of three years. Once you invest in an ELSS fund, you cannot redeem or withdraw the invested amount for three years from the date of investment. This lock-in period encourages long-term wealth creation and disciplined investing.
Investments in ELSS funds qualify for tax deductions under Section 80C of the Income Tax Act, 1961, up to a maximum of ₹1.5 lakh in a financial year. The invested amount is deducted from your taxable income, effectively reducing your tax liability.
Dividend and Growth Options:
ELSS funds typically offer two investment options: Dividend and Growth. In the Dividend option, profits generated are distributed to investors periodically. In the Growth option, profits are reinvested into the fund, increasing the Net Asset Value (NAV) and potentially offering higher returns at redemption.
As ELSS primarily invests in equities, they are subject to market risks. Market fluctuations and volatility can impact the fund’s performance. The returns are not guaranteed and can vary based on market conditions.