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Equity Linked Saving Schemes (ELSS), popularly known as tax saving mutual funds, are equity-oriented mutual funds. As per the SEBI regulations, ELSS funds have to invest at least 80% of their corpus in equity or equity related instruments.
These funds come with a lock in period of 3 years and qualify for tax deduction under Section 80C. Investments in ELSS of up to Rs 1.5 lakh per financial year can be claimed as tax deduction under this section.
Why invest in ELSS funds for saving tax?
ELSS schemes have superior product features than other tax saving investment options under Section 80C like PPF, ULIP, NSC and Tax Saving Bank FDs.
Higher returns: Even though equity as an asset class can be very volatile in the short term, they usually beat other asset classes including the fixed income asset class by a wide margin over the long term. Hence, being invested in equity, ELSS funds have the potential to generate higher returns other Section 80C instruments like Public Provident Fund (PPF), National Savings Certificate (NSC) and tax saving bank fixed deposits over the long term.
Shortest lock-in period: The lock-in period of ELSS funds is just 3 years, the lowest among all tax saving investment options eligible for Section 80C deduction. Among other Section 80C options, NSC has a lock-in period of 5 years whereas in case of Tax Saving Fixed Deposits, the lock-in period is 5 years. The lock-in period of PPF is also 15 years whereas the lock-in period in case of ULIPs is 5 years. Thus, ELSS funds offer the highest form of liquidity among all tax saving investment options.
As ELSS funds offer the greatest potential of creating wealth over the long term, these can be an excellent tool for achieving long term financial goals like Children’s Education fund and post-retirement corpus with contributions lower than its fixed income alternatives.
The 3-year lock-in period in ELSS funds also reduces the redemption pressure for their fund managers during volatile markets. This allows their Fund Managers greater flexibility to take a more long term view while dealing with market volatility with respect to other open-ended funds.
Tips for investment in ELSS funds
- Don’t wait for the last quarter or month of the financial year for investing in ELSS. High valuations in the equity market at that time, if any, would cost you more for the ELSS fund units.
- Opt for the SIP option to spread your investments across the year and benefit from cost averaging during market correction, if any, in the interim.
- Don’t opt for the dividend option. Instead, opt for the growth option to benefit from power of compounding. Dividends are also taxable at the hands of investors as per their tax slab.
