Tax Saving and Wealth Creation with ELSS Mutual Funds

What is ELSS Mutual Fund?

Equity Linked Savings Schemes (ELSS) have scored over other tax saving options for several reasons. 

ELSS offers tax-efficient returns with a lock-in period of just 3 years and tax-free dividends for those who choose the dividend options. Invest in ELSS funds to gain substantial tax-free returns!

An ELSS is an Equity Linked Savings Scheme, that allows an individual or HUF a deduction from total income of up to Rs. 1.5 lacs under Sec 80C of Income Tax Act 1961.

Thus if an investor was to invest Rs. 50,000 in an ELSS, then this amount would be deducted from the total taxable income, thus reducing her tax burden.

These schemes have a lock-in period of three years from date of units allotment. After the lock-in period is over, the units are free to be redeemed or switched. ELSS offer both growth and dividend options. Investors can also invest through Systematic Investment Plans (SIP), and investments up to ₹ 1.5 lakhs, made in a financial year are eligible for tax deduction

See video to get information on ELSS Funds

Why ELSS = Save Tax + Build Wealth

Save tax : Claim deduction up to 1.5 lakhs and save up to 46,800* in taxes under Section 80C of IT Act.

Build wealth : Potential to create wealth since money is invested in equities.

Low lock-in period : ELSS has a lock-in period of only 3 years, as compared to minimum 5 years for other tax saving options. This period is the lowest in comparison to other tax saving options such as 15 years in a PPF or 5 years in a Fixed Deposit option. Thereby ELSS provides higher returns with the lowest lock-in period. 
One of the lowest lock-in periods. ELSS : 3 Years  and others like : Bank Fixed Deposit : 5 years / Public Provident Fund (PPF) : 15 years/ National Savings Certificate (NSC):5-10 years / Life Insurance : 5 years
The Benefit of Compounding : It is generally advised to invest in equity funds for a long time horizon, spanning 5-10 years. ELSS funds by virtue of the lock-in period bring about a disciplined long-term investment by default. In this process, it helps the investors benefit from the power of compounding in the long-run.
Redemption not Compulsory After 3 Years : If the investors are happy with the returns from the respective ELSS fund, they may choose to continue. Redemption is not compulsory after a period of 3 years. It is only a minimum investment duration, however, there is no maximum investment duration. Staying invested for long term is the key to investing in equity investments. ELSS fund’s lock-in period helps bring the required investing discipline. Although, the lock-in period is 3 years, you may choose to remain invested in the fund & allow the growth of your investment for longer term.
SIP Option Available : While investing in ELSS, investors may choose to go with the SIP option. It allows the investor to invest a fixed amount at regular/ periodic intervals. This allows the salaried class to invest a fixed sum from their savings periodically, generally each month.
You may opt for SIP option while investing in ELSS. You can start investing with as low as Rs. 500 per month. This will not only turn you into disciplined investor but would also turn your small savings into investments over the long term. SIP option would also help you reap the benefits of rupee cost averaging.
Higher Returns :  Since ELSS funds invest in equity schemes, the returns are higher (15-20%) compared to other tax saving options (generally, 7-10%). Over a 3 year period, the benefit of compounding coupled with returns from equity provides higher returns for investors.

ELSS allows Indian citizens to reduce their taxable income by Rs.1,50,000 under Section 80C. There are other investment options that help save under this same Section, but ELSS offers the lowest lock-in obligation of 3 years and the possibility of the highest returns. The funds invested in ELSS schemes are exempted from taxation, but if the returns on investment are greater than Rs.1 lakh, they are charged tax at 10% under LTCG. ELSS investments have historically provided excellent returns when compared to similar forms of investment. This investment avenue is also popular with experienced investors who wish to add an equity component to their existing investment portfolio

Comparison of tax saving investments in India

ELSS to Build Wealth

It’s the equity element that gives ELSS it’s unique wealth-creation abilities.

How to get sustained high returns?

This is one of the most frequently asked questions in the field of finance. The answer is simple: invest systematically. Over time, the impact of compounding will help you in generating higher returns. This easy to follow approach is applicable to every type of investor, from the low-risk taker to the ones with a higher risk appetite. The outcome for both will be the same, the only difference being that the low-risk taker will take a longer time to build a large kitty over the one who is willing to take bolder risks.

 To illustrate this method, we built five different scenarios taking into account investments in four different instruments: PPF; Average of equity funds over a 20-year history; and Sensex Total Return Index, which is nothing but Sensex which also includes dividends. In each instance, we took Rs 1.5 lakh as an annual investment because this is the upper limit of what one needs to deploy each year to claim deduction under Section 80C to save on income tax. We took the actual data over the past 20 years of each these instruments to demonstrate wealth creation. Remember, the last two decade includes phases of ups and downs, scams, global events and events local to India, which collectively factor in the impact of these events on our finances.

Top 10 Best ELSS Mutual Funds :

While selecting a fund, you need to analyze different parameters and then invest in a suitable one. Also, investing depends on an individual’s financial goals, investment horizon, and risk appetite.

The following table represents the top 10 performing ELSS funds based on the past 3 years. Investors may look at different parameters like returns of 1 year or 5 years, or different financial parameters.

At End :

Investing in mutual funds might be a cumbersome task for a novice investor. In case you are finding it difficult and not able to decide which fund is the best for your requirements, please contact us for investment and advice where the best performing mutual funds are handpicked by our experts.