Mutual funds India offer investment in mutual funds through various category of funds. There are 5 broad category of mutual fund schemes in India – Equity, debt, hybrid, solution oriented and other category of funds. Again, under various broad categories of funds, there are multiple categories of mutual fund schemes. For example – Under equity, there are many categories of funds like large cap, midcap, small cap, large and midcap, flexi cap, multi-cap and ELSS category of funds.
What are ELSS Funds?
ELSS or equity linked saving schemes are diversified equity mutual fund schemes which also offer tax savings. Investors can get a deduction of up to Rs 1.50 Lakhs in a financial year from their taxable income by investing in ELSS funds, under Section 80C.
Tax savings under Section 80C
Over and above ELSS funds, taxpayers can also claim deductions of up to Rs 1.5 lakhs every financial year from their gross taxable income by investing in various other tax savings schemes like Employees Provident Fund (EPF), National Savings Certificates (NSC), Public Provident Funds (PPF), and 5-year tax saver fixed deposits and life insurance plans, etc.
However, ELSS being market linked investments can offer higher returns over assured income schemes. Unit Linked Insurance Plans (ULIPs) are another example of market linked tax saving scheme under life insurance category.
Equity Linked Savings Schemes
ELSS mutual fund investment comes with a lock-in period of 3 years. These mutual funds diversify their investments across different sectors and companies of different market capitalizations. You can start investing in ELSS funds with as low as Rs 500 only. While there is no upper limit of investments in an ELSS mutual fund, you can claim tax deduction of up to Rs 1.5 lakhs only.
Even though the ELSS mutual fund is locked-in for 3 years, they are called open-ended mutual funds. As the name suggests redemptions from ELSS funds are not allowed before completion of 3 years period from the date of investment.
You can invest in ELSS by way of SIP and/ or in lumpsum. However, please note that, if you are investing in ELSS through SIP, each SIP installment will be locked in for 3 years from their respective investment dates.
Wealth creation by ELSS mutual funds
Mostly investors invest in tax saving funds purely for the purpose of tax savings. However, when you invest in ELSS funds, you get capital appreciation too over and above purely tax savings objective as these funds invests in equity and equity related instruments.
If you look at the historical data, it shows that equity, as an asset class, has the highest potential of generating superior returns in the long term. For example – In the last 20 years (ending 25th May 2023) CNX Nifty has given 15.74% annualized returns (CAGR) – Source: NSE, Advisorkhoj Research, as on 25th May 2023. Rs 1 Lakh invested in CNX NIFTY 20 years back is now worth Rs 18.65 Lakhs.
Who should invest in ELSS mutual funds?
- Investors looking for tax saving as well as capital appreciation over long investment tenures can invest in ELSS.
- Investors who have a minimum of 3 years of investment horizons can invest in ELSS funds.
- Investors who have high to very high-risk appetites for investing in mutual funds.