ELSS mutual funds are also referred to as tax-saving mutual funds. Section 80C of the Income Tax Act, 1961, allows investors to claim deductions of up to Rs 1.5 lakh a year by investing in ELSS mutual funds. By investing in these mutual funds, you get the dual benefit of tax deductions and wealth accumulation.
1. What are ELSS Mutual Funds?
Equity-Linked Saving Scheme (ELSS) or tax-saving funds, falls under the diversified category of mutual funds
. While their maximum exposure is towards equity and equity-oriented securities, a part of the corpus is also invested in debt instruments. ELSS aims at providing the dual benefit of capital appreciation and tax-savings simultaneously. These funds have a mandatory lock-in period of three years, which is the shortest among all 80C options.
2. Who should invest in ELSS Mutual Funds?
Any individual or HUF can invest in ELSS. However, these funds are suitable only for those who are knowledgeable, have risk-taking abilities and can stay invested for the long term. Young investors in the initial years of their professional career can invest with a long-term horizon. ELSS is best suited for young investors as they have time on their side to unleash the power of compounding to the fullest and enjoy high returns while saving on taxes of up to Rs 46,800 a year.
3. Advantages of ELSS Mutual Funds
a) The lock-in period of three years is the shortest of all Section 80C avenues.
b) ELSS mutual funds have the potential to offer much higher returns than other tax saving instruments such as PPF or NPS.
c) Earnings are taxed only at 10% of the gains (long term).
d) There is no capping on investment.
e) Investors need not have in-depth knowledge of the markets.
f) Mutual funds are managed by professional fund managers who have the unmatchable experience, and they work towards maximising the return on your investment.
4. Options for Investing in the Best ELSS Mutual Funds
a) Growth Option
Under the growth option, you will not receive dividends. You receive your gains only at the time of redemption. This helps in appreciating the total NAV and thus multiplies the profits. The only caution here is that the returns are subject to market risk. Markets might not work in your favour every time.
Under this option, you get dividends whenever declared by the fund house. The dividend is declared only when there are excessive profits, over and above.
c) Dividend Reinvestments Option
This is an option under which you reinvest the dividends received to add to the NAV. This is a good option, mainly when the market is playing well and is likely to continue the same way.
5. How to evaluate the Best ELSS Mutual Funds
a) Fund Returns
Compare the fund’s performance with peers to ensure that the fund has been consistent over the past years. Based on these parameters, you can invest in the recommended funds.
b) Fund History
Choose fund houses that have performed consistently over a long period, say five years to ten years. A fund’s performance is reflected based on the quality of stocks in its portfolio and benchmark.
c) Expense Ratio
Expense ratio depicts how much of your investment goes towards managing the fund. A lower expense ratio translates into higher take-home returns. You need to choose that fund, which has a lower expense ratio.
d) Financial Parameters
Consider various parameters such as Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta to analyse the performance of a fund. A fund with a higher standard deviation and beta is riskier than a fund having a lower deviation and beta. Choose funds with a higher Sharpe Ratio as they offer higher returns for the additional risk you take. The fund manager plays a crucial role.
6. Top 10 Best ELSS Mutual Funds
While selecting a fund, you should analyse and compare various funds from all perspectives before choosing one. The following table shows the top-performing ELSS funds based on the past five-year returns.
*The order of funds do not suggest any recommendations. The investor may choose the funds as per their goals. Returns are subject to change.
Investing in mutual funds might be a cumbersome task for an amateur investor. In case you are finding it difficult and not able to decide which fund is the best for your requirements, then reach out to us. We offer only handpicked funds from experts.