Have you heard about ELSS funds??
Do you invest in ELSS funds??
If you have been investing in mutual funds then there are high chances that you must have come across this investment option – ELSS funds or Equity Linked Saving Investment Fund.
In past articles, I have discussed in detail about mutual funds, their types, and analysis of fact sheet. In this article, I shall explore ELSS Tax Saving Mutual Funds and talk about all the aspects that you need to know about them.
What are ELSS FUNDS?
ELSS or Equity Linked Savings Scheme funds are diversified equity mutual fund that gives you the dual benefit of tax saving with equity growth. ELSS invests a minimum of 80% of its assets in equity or equity-related instruments. You can also claim tax deduction up to 1,50,000 Rs. under section 80(c).
ELSS funds have a locking period of 3 years, which means once invested you’ll not be able to access your money. Equity investment helps in beating inflation in the long run.
You as an investor would look for investment opportunities that can help in generating wealth and minimizing tax. There are numerous investment options that can be opted to earn a decent return, but the returns are taxable based on income tax rules.
ELSS funds solve this issue. The income generated under ELSS would be considered as LTCG or Long term capital gain and would be exempted from taxation if less than 1 lac. It shall be taxed at 10 % if the returns are higher than 1 lac.
Features of ELSS Funds
1.Composition of ELSS Funds
In ELSS a minimum of 80% of the total investible corpus is invested in equity or equity-related instruments. The fund manager can increase based on his analysis but cannot reduce the below set limit.
Equity exposure helps in generating better returns as compared to other funds in the long run.
The fund manager generally invests in a diversified manner and invests across different market capitalizations stocks i.e Large-cap, mid-cap, and small-cap.
The fund manager also takes into account different themes and sectors. Thus ELSS act as a well-diversified fund.
2.Tenure Of Investment
In ELSS funds you need to stay invested for a minimum of 3 years, which means you cannot access or withdraw your investments before the expiry of the lockin period.
There is no maximum tenure of investment and you can stay invested for a long period. That’s the only difference a regular mutual fund and ELSS has, that’s why ELSS has a tax benefit credit.
ELSS funds enjoy tax benefits, on the invested amount under Section 80C of the Income Tax Act.
You can claim tax benefits for investment up to 1,50,000 INR. A HUF can also invest in ELSS and avail of the tax benefits.
4.Tax Treatment on Return
As mentioned in the last point the investment in ELSS funds is tax exempted up-till 1,50,000 under section 80 c. However, the return which is being generated attracts taxation.
The returns being generated are termed as LTCG or Long term capital gain. If the returns are till Lacs there wouldn’t be any tax but if they cross 1 Lacs, your return shall be taxed at 10%.
The tax part is fixed at 10% and it doesn’t get affected by your level of income and tax slab. Even if you are in highest tax slab, you’ll be charged at 10%
You can invest in ELSS both by SIP i.e. systematic investment plan or Lump sum route. In SIP you commit to investing a predefined amount for a predefined period of time, whereas in the lump sum route you need to invest in one go.
Both options have their merits and primarily depends on investors need and requirement.
Benefits of ELSS Tax Saving Mutual Funds
ELSS funds offer to vide range of benefits to investor, few of them are as:-
ELSS funds invest across a diverse group of companies ranging from small-cap to mid-cap to large-cap and across various sectors.
This allows you to add the element of diversification to your investment portfolio.
The portfolio diversification helps in reducing the risk and equity investment help in beating inflation. Hence ELSS helps in higher return at reduced risk.
2.Low minimum amount
You can start investing in ELSS with as low as Rs 500 Only. This ensures that even a small investor having limited savings can participate and be benefitted.
Small investment also helps investors to stay invested for long.
ELSS funds give you tax benefits both at the entry and exit points. When you enter the market you can claim tax benefit under 80 (C) and when you wish to withdraw you can claim tax exemption under LTCG (long term capital gains)
Though there is some predefined level to which you can avail benefits, yet you will have very few investments that give you this benefit.
Primarily there are three options available to you if you wish to invest your money into ELSS. They are as follow:
Under the growth option, you shall not receive any benefit in the form of dividends. In this case, your NAV i.e net asset value gets increased by dividend amount, which otherwise has been declared.
The benefit of the growth option is for long term investors.
The benefit of Growth would be given only at the time of redemption.
Under the dividend option, investors receive benefits in the form of dividends as and when declared by the fund house. This way these options give flexibility to the investor.
Any dividends earned under this option are exempt from taxation and you would get the whole amount.
ELSS Compared to Other Tax-Saving Options
A comparison of ELSS with other popular tax-saving instruments will help you understand its efficacy and benefits.
Factors to consider before investing in an ELSS.
Reviewing past performance helps you determine how well the tax saver scheme has performed in the past. Ideally, you should look at the returns the fund has generated since inception and at various data points like 1 yr, 3 yrs, 5 yrs etc.
Though past performance is not an indicator of how well a fund will perform in the future, it gives a fair idea
Whenever you invest in mutual funds there is an expense ratio attached to it.
Expense ratio is charged which the fund house charges for all the expenses ranging from fund management charges, brokerage to the distributor , employee cost, and other sundry costs.
Its always advisable to look for the ELSS mutual fund which charges the least but it should not come at the expense of growth.
You should give more weightage to return which the fund has generated over the expense ratio.
Funds that have historically performed well and have strong fundamentals and are favored by investors.
It quite obvious these funds would be attracting lots of investment because of their past return trend.
While selecting ELSS mutual funds try to have Scheme which is neither have huge funds nor have limited funds, as both have their shortcomings. You should try to find the scheme having AUM between the two extremes.
Hence, when making a comparison between various ELSS tax saver funds, the size of the fund is usually a good indicator of which fund would be a better option to invest in.
Though it cannot be said the same for the new funds.
There are various agencies and independent consultants who would award ratings based on past returns and performance. Everyone has different parameters to evaluate the best fund.
If you need to find the best fund based on fund ratings, find out the average rating of the fund over the past 3 to 5 years.
This would give a fair idea about the fund.
Best ELSS Mutual Funds*
Sometimes it becomes difficult to choose a fund from lots of options. I have sorted out ELSS top funds based on the past trend. ELSS performance is important before selecting a particular fund.
ELSS or Equity Linked Saving Scheme is a unique investment option that gives the dual benefit of investment and tax benefit. There is a locking period of three years. This is a must-have in investors’ portfolios.
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