Mutual funds are known for the wealth they create over a period of time. However, very few are aware of the fact that there is one tax saving category of mutual funds which allows an investor to save some on taxes. The category we are referring to is ELSS or equity-linked savings scheme.

These funds invest a minimum of 80% of the total assets in equity and equity-related instruments. These funds are different mutual funds are known for the wealth they create over a period of time. However, very few are aware of the fact that there is one tax saving category of mutual funds which allows an investor to save some on taxes. The category we are referring to is ELSS or equity-linked savings scheme.

These funds invest a minimum of 80% of the total assets in equity and equity-related instruments. These funds are different in the sense that these allow an investor to claim deduction under section 80 C up to a maximum limit of Rs 1.5 lacs.

These funds have a minimum lock-in period of 3 years which means that an investor is not allowed to withdraw his investments before this time period. It is one of the lowest lock-ins under tax savings category.

Advantages Of Investing In ELSS

• Long term wealth creation
• Superior returns over a long period
• Lock-in period of just 3 years Tax saving instrument
• Tax saving instrument   

How ELSS is better than tax saving FD's?

• ELSS funds have a lock-in period of only 3 years whereas in case of tax saving FD's it is 5 years.
• ELSS funds have the potential of generating returns around 14%-16% whereas 5 years FD's are currently providing only 6.60%.
• Interest income earned from FD is fully taxable in the hands of the investor while on the other hand capital gains from ELSS funds are taxed @ 10%, only on gains of over Rs 1 lac during a particular financial year.

How ELSS is better than PPF?

• PPF has a minimum lock-in period of 15 years whereas in the case of ELSS it is just 3 years.
• One has to contribute a minimum amount of Rs 500 every financial year in his PPF account while in case of ELSS there is as such no compulsion of making the regular investment.
• Rate of interest in case of PPF is not very encouraging and are on a downward trend while ELSS, on the other hand, generates as much as twice the returns of PPF.

FAQ's

A. ELSS funds have generated returns of around 14%-16% over the last 5 years.

Q. How can I invest in ELSS funds?

A. One can invest either in lump sum amount or through SIP's by availing the services of advisors, distributors or AMC's. However, the preferred way would be to reach out a financial advisor.

Q. Is making an investment in ELSS funds risky?

A. Since ELSS funds invest 80% of its total assets in equity and equity-related instruments, these can be risky bets in short duration; however, over a period of time, they can generate mouth-watering returns.

Further Reading: