ELSS funds or Equity Linked Savings Scheme are the best tax saver mutual funds to help you save taxes, create wealth, and get streamlined and high returns. Several tax-saving investment schemes are available, but many of the generated returns are taxed according to the Income Tax rules. This is where ELSS funds will help you.
Essential Features of ELSS Funds:
- Minimum 80% of the corpus is invested in equity/equity-related instruments.
- There is a minimum lock-in period of 3 years but no maximum tenure of investment.
- Income is treated as
LTCG and offers tax deductions of up to Rs 1,50,000 a year under Section 80C provision.
- ELSS funds are the only tax-saving investment that offers inflation-beating returns giving you the twin benefits of tax deductions and wealth creation.
Benefits of Investing in ELSS Funds:
ELSS Tax Saving funds offer a massive range of benefits, including:
- Diversification
– You can invest across a diverse group of ELSS companies ranging from small-cap to large-cap and across various sectors, thus reducing the risk factor.
- Low minimum amount
– You can invest as low as Rs.500 without accumulating a reasonable investible corpus.
- SIPs
– You can choose the SIP method as it allows you to invest in small amounts and avail of tax benefits along with an opportunity to create wealth. There is no maximum limit to your investment amount, but you simply have to ensure the amount is locked in for a minimum time period of 3 years. You can avail of tax benefits as suggested by Section 80C of the Income Tax Act.
- Risks: The
ELSS category has given 15.2% returns in a year, whereas the diversified funds have given 14.3%.The best performing ELSS fund has given a 21.7% return in five years, and the worst performer has given only 3.8%.
- Tax Deduction -
Out of all the diversified equity fund options, ELSS funds, as initiated by the federal government, are the only ones offering tax deduction benefits:
- The amount invested up to Rs 1.5 Lakhs is exempted.
- The maturity amount received and any interest earned from these funds are also exempted from tax.
How to Choose ELSS Mutual Funds and How They Work:
You must follow these specific rules of thumb to evaluate mutual funds before investing in them:
- 1. Performance of the Fund
You must check the current and past performance and the consistency of the ELSS funds. Further, you can compare the fund’s performance with that of its benchmark.
2. Professional Management
Professional fund managers manage ELSS funds, so even if you don’t have any know-how about investing in the best tax saver mutual funds, you can still earn maximum returns compared to other traditional tax saving options.
3. Fund History
You must check the fund house, along with its years of experience and its governance. The older the fund house, the better it can handle your fund’s portfolio in all situations.
4. Investment Horizon
You must have a longer than five years investment horizon to consider investing in ELSS funds to mitigate market volatility.
5. Expense Ratio
The expense ratio is a calculated percentage of the NAV and is measured as the cost you incur while investing in these mutual funds. So, make sure the fund has a lower expense ratio to get higher returns.
6. Taxation
The taxation policy should be thoroughly reviewed and looked into, especially during the redemption and maturity of the invested funds. The short and long-term tax benefits should be taken into consideration.
7. Sharpe Ratio
Sharpe ratio is also called the average portfolio return, which is calculated as the risk-free rate/standard deviation of the portfolio that evaluates the return of the fund against the risk. The higher the ratio, the better the fund.
8. Mode of Investing
You should regularly invest via a systematic investment plan for long-term gains to earn multiple benefits.
9. Standard Deviation
Standard deviation is the degree to which the fund’s return fluctuates around the average return and shows the volatility in a fund’s performance.
10. Alpha and Beta
Alpha is the excess return of a fund and should be on the higher side, whereas Beta, which actually measures the volatility of a fund as compared to the market, should not be more than 1.
11. Returns
ELSS funds do not provide guaranteed returns, however, funds invested over five years can give higher returns than any other tax-saving investment option.
12. R-Squared
Look for a high R-Squared investment that is shown between 0-100, and that portrays how any kind of price change in an asset is correlated to its benchmark and how a fund can earn expected returns.
5 Ways to Invest in ELSS:
You can invest in the following ways:
- Invest directly from an Asset Management Company (AMC)
- Invest through an online mutual fund investment platform
- Invest using your existing Demat account
- Invest through registrars
- Invest through your agent
- The Bottom Line
ELSS funds offer a powerful combination of equity investments, prospective capital appreciation, and tax savings. Since they are equity funds, you must invest long-term and avail of tax benefits. If you want to learn more about ELSS funds and you can benefit from them, click here.
