The only tax saving investment option that provides tax free returns for short period is ELSS Mutual funds.
An ELSS comes with a statutory lock-in period of 3 years and qualifies for a tax exemption under section 80C of the Income Tax Act which allows a maximum tax exemption of Rs.1,50,000.
The mutual fund is managed by financial experts and fund houses on your behalf.
Nowadays, financial planning is a necessity for every household. But, hiring a financial planner is not feasible for everyone, especially for an average India. However, there are many schemes which have been initiated to reinforce India's economic development and assist the citizens to accomplish their financial goals. Investment in an Equity Linked Savings Scheme is one of the most suitable option under a mutual fund.
An Equity Linked Savings Scheme (ELSS) is a type of an equity mutual fund which invests at least 80% of its total assets in equity and equity-related instruments. An ELSS comes with a statutory lock-in period of 3 years and qualifies for a tax exemption under section 80C of the Income Tax Act which allows a maximum tax exemption of Rs.1,50,000.
Features of ELSS Scheme
1. It is a tax-saving scheme that mainly invests in a very heterogeneous portfolio of stocks.
2. The amount invested is subjected to a mandatory lock-in period of 3 years.
3. One can invest with a minimum amount of ₹500 and then multiples of ₹500.
4. Investors have an option of investing through SIPs which brings about a disciplined approach towards accumulating savings.
5. ELSS funds invests in equities, therefore, investors are subjected to market related risk and should consider their appetite for risk before investing.
Benefits of ELSS
1. Lowest lock-in period
ELSS mutual funds come with lock-in period of 3 years. It has the least lock in period compared to other 80C options.
2. Growth of equity
Since an ELSS mutual fund invests in equity related instruments, these schemes would help you to grow your money when the stock market grows over a period of time
3. Tax free Returns and Dividends
If you observe, none of the returns from tax saving investment options other than PPF, ELSS and ULIP are tax free. NSC, Tax Saving Bank FD, Tax saving Post office scheme etc. all these tax saving options’ returns are taxable based on individual tax slab. However, interest on Public Provident Fund is tax free, but that comes with a 15 year lock-in period (apart from certain exemptions to withdraw in between). The only tax saving investment option that provides tax free returns for short period is ELSS Mutual funds.
4. Not required knowledge of the stock market
You are not required to have comprehensive knowledge of the stock market and mutual funds. The mutual fund is managed by financial experts and fund houses on your behalf. They ensure that the fund attains a break-even as defined by its investment objective.
How to evaluate ELSS?
1. Fund History
This means that you need to check on the previous history of a group of fund along with their fund houses in order to determine their performance.
2. Expense Ratio
Expense ratio is the amount charged to manage the fund by a fund house. The lower the expense ratio, the better the take-home returns. Always, choose a fund which has a lower expense ratio.
3. Fund Returns
Ensure that you check at least the past 5 year performance before investing in any mutual fund. Similarly, compare the benchmark performance as well.
4. Financial Parameters
Financial parameters include Standard Deviation, Sharpe ratio, Alpha and Beta. They help in analysing fund performance. A mutual fund with a higher SD and beta carries more risk as compared to a fund having lower deviation and beta.
Top ELSS Mutual Fund Investments in 2018-19
Fund Name |
1 Year Return |
3 Year Return |
5 Year Return |
1. Axis Long Term Equity Fund |
1.61% |
10.40% |
21.47% |
2. DSP Tax Saver Fund |
-7.71% |
11.40% |
17.83% |
3. Reliance Tax Saver Fund |
-19.53% |
6.74% |
19.09% |
4. ICICI Pru Long Term Equity Fund |
1.86% |
10.08% |
17.34% |
5. Aditya Birla Sun Life Tax Relief’96 Fund |
-3.33% |
12.01% |
20.14% |
Note: The above data is based on NAV of direct growth schemes as recorded on November, 2018 and subject to change.
Options for investing in ELSS Scheme
1. Dividend Option
An ELSS funds with a dividend option entitles the investor to receive dividends. The dividends are completely tax free.
2. Dividend Reinvestment option
Under this scheme, investors have the option to reinvest the dividends back into the mutual fund in order to increase the NAV value.
3. Growth Option
This option does not entitle any dividend to the investors. This enables in appreciating the total NAV of the mutual fund and has a better potential of generating profits.
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