Investing in ELSS Mutual Funds to Save Tax

Aha! it is that time of the year when saving tax is a top priority for many in India. If you have not done your tax planning in advance then most are willing to invest in hurry in any tax scheme before the 31st March. But wait before you rush; just pause and consider various options of tax saving; ELSS mutual funds is a great one.

ELSS Explained:

ELSS Funds Chart

ELSS as quite a few of you would be aware stands for Equity Linked Savings Scheme. These are mutual funds which work like any other fund except the fact that investing in them gives you tax exemption under Section 80C.  These funds are diversified equity funds that combine capital appreciation with tax benefits. Since all tax savings instruments necessarily come with a lock-in period; you cannot exit an ELSS before 3 years. This aspect differentiates it from other tax savings option where the lock-in period is 5 years. This can look like an advantage but it is better to stay invested for longer period to get better returns as all mutual funds are known to better over a 5 year period. Looking at the past returns for a longer period also lets you assess the stability and the performance of a fund.  Lot of funds can do well in one year but may not do so well over a longer period. As the chart show that if you stay invested for a longer duration you tend to get higher returns.

Data source

Why and How To Invest in ELSS?

Apart from the obvious reason to save tax there are many more compelling reasons to invest in ELSS; they are high returns vis-a-vie other tax instruments and due to lock-in of three years the returns will qualify as long-term capitals gains and you are not required to pay any tax on them. Though equity market has not been doing well off late; ignoring equities altogether in your portfolio is not a good idea. Be it FD’s

Another aspect that makes them attractive is the short lock in period when compared to other instruments like FD (lock-in of five years), NSC (lock-in for six years) and so on. The SIP (Systematic Investment Plan) where you can invest a small amount every month makes them rank high on convenience. So right at the beginning of the year you can start a SIP and plan ahead so that you are not cornered at the end of the financial year. Another plus is that there are more than 80 schemes to choose from offered by various reputed financial firms. Though the major exposure is in equity; the equity component may vary from 80 to 99%.

But it is important to mention here the aspect that can make ELSS attractive; high returns comes with the inherent risk of uncertain returns. So it is not a suitable for a risk averse investor. Also it is not prudent to invest only in ELSS funds; they can be combined with other tax saving instruments. A portion of 30-40% of the tax saving corpus can be put into these funds depending on your age and risk appetite.

The above chart displays the name of some ELSS mutual funds ranked by Crisil that have managed to perform very well in the last five years and be considered to be a good pick. It goes without saying that due diligence should be done before choosing any ELSS.

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  1. tsashok says

    Hi. Good one. But you could have explained other best products for tax saving also..We require more knowledge on this..

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