ELSS Funds

Equity Linked Savings Schemes (ELSS) are diversified equity mutual funds where atleast that invest at least 80% of the corpus is invested in equities and offer tax deduction benefits of up to ₹1.5 lakhs (Section 80C) as per Income Tax rules. It is the only MF scheme that is focused on providing tax savings to its investors.

As the name suggests, ELSS funds are closed-end schemes that invest at least 80% in companies of varying market capitalizations.

ELSS funds have a lock-in period of three years, which is the shortest among all tax-saving investment options under Section 80C. Once the lock-in period ends (during which you cannot withdraw the funds), there is no STCG. Instead, LTCG is payable on any amount after deducting ₹1.5 lakhs.

The main reason or benefit of investing in an ELSS mutual fund is the tax advantage offered here. But, try not to ignore the other advantages, such as;

• Tax Benefits - ELSS mutual fund investments are eligible for a tax benefit up to ₹1.5 lakh deduction under Section 80C of the Income Tax Act.
• Shortest Lock-in Period - These funds have a mandatory lock-in period of three years, which is shorter compared to similar tax-saving options like the Public Provident Fund (15 years) and National Savings Certificate (5 years). ​
• Equity Exposure - By investing in equities, ELSS funds have the potential to generate returns higher than debt instruments.
• Flexibility - Due to the flexibility available, you can invest at your pace – SIP or lump sum, whatever suits you.
• Ease of Access - Since investors can begin with as little as ₹500, many people can invest in these funds.
• Discipline: The 3-year lock-in period ensures disciplined investing and prevents impulsive withdrawals.

Investors who are prepared to manage some market-linked risk in exchange for long-term wealth creation are a good fit for equity-linked savings plans. Here is an overview of the ideal profiles for ELSS mutual fund investments:​

• Salaried Employees: As a salaried employee, the Employee Public Fund (EPF) is a default investment option. It can be a suitable choice for the workforce.
• Young Professionals: If you've just started earning and want to start investing, an online ELSS fund can be the first step. You can begin with a small SIP and stay invested for the long term.
• People Who Want to Beat Inflation: While ELSS is a tax-focused fund, it also invests in equities to give market-linked returns. In short, your investment grows with time and gets inflation-adjusted.
• Those Comfortable with 3-Year Lock-in: ELSS has the shortest lock-in among all tax-saving options – PPF and NSC. So, if you're someone who doesn't need quick liquidity, you can stay invested patiently in these funds.
• Goal-Based Investors: These funds can be ideal for people saving for long-term goals (like a home, retirement, or children's education) and looking for tax-saving options.

ELSS funds work similarly to other types of mutual funds. But, over here, you have the plus point of tax benefit under Section 80C.

• Resource Pooling: A professional fund manager oversees the pooling of individual investments to create a significant corpus.​
• Diversified Equity Investments: To create a mix of risk-returns, the fund management allocates this corpus to a diverse portfolio of stocks, selected from a range of industries and market capitalisations. ​
• Enforcement of Lock-in: All investments are locked in for a period of three years, during which time investors cannot redeem or remove their money. In keeping with the nature of equity investments, this promotes a long-term investment horizon. ​
• Tax Efficiency: At maturity, the gains from ELSS funds are recognised as Long-Term Capital Gains (LTCG), in addition to the initial tax deduction on the invested amount. Any gains over ₹1.25 lakh are subject to 12.5% taxation without the indexation advantage.