Equity Linked Savings Schemes (ELSS Funds)

Why Are ELSS Mutual Funds the Best Tax-Saving Option?

Features of ELSS Mutual Funds

The main features of tax saving mutual funds that investors should be aware of are as follows:

• Every investment in an ELSS mutual fund is locked in for a period of three years, and cannot be redeemed.

• ELSS Mutual Funds invest into equities; hence they can be quite volatile compared to traditional options. It’s very important to understand the risk/reward associated with tax saving mutual funds before investing into them

• There is no limit to the amount you can invest into tax saving mutual funds; however, you will receive a deduction of up to Rs. 1.5 Lakhs in a financial year under section C of the old Income Tax Regime. Please note that this doesn’t mean that you can save up to Rs. 1.5 Lakhs by investing into ELSS mutual funds – it means that you can deduct up to this amount from your taxable income for the year!

Why Should You Invest in ELSS Tax Saving Mutual Funds?

Despite their growing popularity, lots of investors remain confused about whether they should opt for an ELSS over traditional options like PPF or Tax Saving Fixed Deposits. We believe that if your financial goals are long term, you should definitely go for a tax saving mutual fund!

In the long run, the difference between a 7% return and a 12% return can be exponential. As of September, ’24, ELSS as a category has provided investors with 5 year returns exceeding 14% per annum, and this is generally the type of return that tax saving mutual funds have generated for investors over long periods. Hence, we believe that investors with long term goals should aim to get a good understanding of the interplay between risk and reward, and divert their 80C investments to ELSS instead of fixed return options.

How FinEdge Can Help You to Invest in ELSS Tax Saving Mutual Funds

• Goal Based Investing: ELSS investments made through us will not be ad hoc, but rather, would be linked to clearly defined financial goals – thereby increasing your chances of maximizing returns from your tax saving mutual funds. Imagine investing to save taxes can also lead to saving for your goals like Retirement, Child's Education or buying that Dream House of yours.  
• Collaborative Approach : We are not a DIY (Do it Yourself) platform and that makes us unique. Our investing platform called DIA (Dreams into Action) platform has been created keeping unique investor needs in mind. Since we believe that investing is not a one size fits all process, hyper-customisation is key, where understanding of household cash flows, Financial Health Ratios and Goals becomes important. This process is carried out on our platform and gives you in depth understanding of your unique financial situation.  The support of an expert is another critical component of your investing journey with us. The expert will co-own your goals and support you on your investing journey at every step!
• Seamless Onboarding: Even if you are a first time investor into Mutual Funds, we’ll get your formalities completed in just five minutes! We follow a paperless onboarding process that has built in convenience and experience

Invest in ELSS - SIPs or Lumpsum ?

We would recommend the SIP (Systematic Investment Plan) mode of investing when it comes to investing into ELSS mutual funds. Unfortunately, most of us make our tax saving mutual fund investments at the end of the financial year, and in one shot. Not only does this put an undue strain on your pocket; it also increases the overall risk of your equity investment. Instead, an Investmenet Manager could help you arrive at your 80C “gap” at the start of the financial year, and you could divide this amount by 12 and start an SIP in ELSS Mutual Funds in April itself. This will ensure that your risks get smoothed out through a process known as “Rupee Cost Averaging”.

Achieve Long-term Financial Goals & Save Tax With ELSS Mutual Fund

Since ELSS mutual funds are long term investment plans, they are ideally suited for long-term financial goals such as your retirement or a young child’s college education. After all, ELSS mutual funds are really just diversified equity funds, and can therefore form an integral part of your overall financial planning if you map them to specific goals instead of investing into them in an ad hoc manner. It’s a well-known fact that aligning your investments to clearly defined goals increases your chances of investing success, and the same principle applies to ELSS mutual funds as well!

Frequently Asked Questions - ELSS Tax Saving Mutual Funds

Who Can Invest in ELSS Funds?

Resident Indians, NRI’s and PIO’s can invest into ELSS Mutual Funds. To invest into tax saving mutual funds, you must be KYC compliant. With our digital onboarding process, you can complete your KYC formalities in a matter of minutes.

What Is the Lock-in Period in ELSS Mutual Funds?

The stipulated lock in period for ELSS Mutual Funds is three years. Please do bear in mind that each SIP tranche would be counted as a fresh purchase and remain locked in for three years from it’s purchase date.

How Much to Invest in ELSS Funds?

There’s no limit to the amount you can invest into ELSS Funds – however, the maximum allowed tax deduction is Rs. 1.5 Lakhs (the Section 80C limit). Ideally, you should invest up to Rs. 1 5 Lakhs in ELSS funds and allocate the rest to other diversified equity funds as per your goals.

NPS or ELSS - Which Is Better?

Although NPS is a superior tax saving option compared to a lot of traditional options such as life insurance and PPF, their returns pale in comparison when it comes to ELSS Mutual Funds. Also – NPS enforces restrictions when it comes to maximum equity allocation, making it a suboptimal long-term investment avenue. Hence, tax saving mutual funds score over NPS in the long run. However, you can use ELSS to complete your 80C quota, and then invest a further Rs. 50,000 a year into NPS to avail of an addition deduction under section 80CCD(1B).

PPF or ELSS - Which Is Better?

Although PPF investments are less volatile, their long-term returns can never beat those from ELSS Mutual Funds – and in the long run, the difference between 7% and 12% is more than you can imagine. Hence, ELSS Funds score over PPF as a tax saving avenue.

How ELSS Saves Tax?

From a regulatory standpoint, all mutual funds (including ELSS Funds) are extremely safe. Mutual Funds are structured as a trust, with the unit holders as the ultimate beneficiaries of the trust. Having said that, it’s important to know that ELSS Funds invest into stocks, and the stock market can be volatile. What this means is that your fund value could fluctuate in the short term, and your returns will not be linear, unlike those from FD’s and PPF. However, by investing via SIP’s and by holding on for the long term, risks associated with equity investing tend to get smoothed out.