Indian investors who want to increase their wealth while lowering their tax obligations are increasingly turning to Equity Linked Savings Schemes (ELSS). ELSS has emerged as a popular choice for people with a moderate risk appetite due to the possibility of higher returns when compared to more conventional tax-saving options like PPF and NSC. However, it’s important to know how ELSS operates, how it differs from other mutual funds, and if it’s a good addition to your portfolio before making an investment.
You can determine whether ELSS mutual funds fit with your financial objectives by reading this article, which makes them easier to understand.
What Are ELSS Mutual Funds
One kind of equity mutual fund that focuses on investing in equity and equity-related instruments is called an equity-linked savings scheme, or ELSS. Under Section 80C of the Income Tax Act, these funds provide tax deductions of up to ₹1.5 lakh.
Important ELSS Features:
- The minimum required lock-in period is three years.
- Tax Benefit: An annual tax deduction of up to ₹1.5 lakh.
- Investment Mode: lump sum or SIP (as low as ₹500 per month)
- Returns: Historically, returns have ranged between 10% and 15% over the long term, but this depends on market conditions and is not guaranteed.
- Due to their equity exposure, ELSS funds carry a high level of risk and can be volatile, especially in the short term.
How Are ELSS Different from Normal Mutual Funds?
1. Tax Benefits:
ELSS: The tax-saving feature of ELSS is one of its primary draws. Section 80C of the Income Tax Act allows for a deduction of up to ₹1.5 lakh for investments made in ELSS. Because of this, it is a popular option for taxpayers and salaried individuals who want to lower their taxable income while trading stocks.
Other Mutual Funds: The majority of other mutual funds, such as debt, equity, and hybrid funds, do not provide a tax deduction for the amount invested. Certain funds do not qualify for 80C benefits, even though they might have capital gains characteristics that make them tax-efficient.
2. Lock-in Period:
ELSS: It has a three-year mandatory lock-in period, meaning you are unable to withdraw your money before then. This lock-in gives fund managers a comparatively stable corpus to manage and guarantees disciplined investing.
Other Mutual Funds: Generally speaking, regular open-ended mutual funds with no lock-in period include debt, equity, and balanced funds. Although exit loads might apply for early redemption, investors are free to redeem their units whenever they choose. Lock-in or maturity periods are a feature of some closed-ended funds and fixed maturity plans (FMPs), but they are unrelated to tax savings.
3. Purpose:
ELSS: ELSS has two functions: it offers a tax-saving option in addition to aiding in wealth creation through exposure to the equity market. It’s one of the few market-linked products that provides both advantages, making it attractive to investors who are tax-conscious and both conservative and growth-oriented.
Other Mutual Funds: Depending on the fund category (e.g., debt for stability, equity for growth), the main goal of other mutual funds is either capital preservation, income generation, or wealth creation. They don’t provide any extra tax breaks for making investments.
| Criteria | ELSS | Regular Mutual Fund |
| Tax Deduction | Yes (Section 80C) | No |
| Lock-in Period | 3 Years | Usually No Lock-in |
| Liquidity | After 3 years | Anytime (except closed-end) |
| Ideal For | Tax-saving investors | General investors |
Are ELSS Mutual Funds Worth It?
Yes, ELSS is definitely something that many investors should think about, particularly if they want to save money on taxes while also gaining long-term capital growth.
Pros of ELSS:
- Helps the investor in tax-saving.
- High potential return: Superior to PPF or fixed deposits.
- The lock-in period is shorter compared to other schemes like PPF.
- Simple to get started: SIPs start at ₹500 per month.
- Wealth creation: Suitable for long-term financial goals.
Cons of ELSS:
- Market Risk: Returns are subject to market fluctuations and are not guaranteed.
- Lock-in Period: The investment is locked in for three years, with no early withdrawal options.
- Not ideal for short-term goals: ELSS is better suited for long-term investments, as market volatility makes it less appropriate for short-term objectives.
Bottomline
ELSS mutual funds are among the most effective financial products under Section 80C because they provide a special balance between wealth accumulation, tax savings, and liquidity. In contrast to conventional tax-saving options like National Savings Certificates (NSC) and Public Provident Funds (PPF), ELSS allows your money to grow through equity markets. These funds have continuously outperformed several fixed-income options over the last five to seven years.
To sum up, ELSS mutual funds are worth it, as long as you approach them with the appropriate attitude. Consider them as a way to achieve long-term financial growth and save on taxes. Before making an investment, as with any other, determine your risk tolerance, establish specific objectives, and, if necessary, seek financial advice.
Written by: Tanya Kumari
