All You Need To Know About ELSS Mutual Funds

Investors are constantly searching for investment options that can provide wealth generation, consistent returns, and tax savings. Although there are various investment options available, many of them are subject to income tax on the returns they generate. This is where ELSS (Equity Linked Savings Scheme) funds come into play. These are tax-saving equity mutual funds that provide an attractive tax savings benefit to investors. In this article, we will delve into the world of ELSS tax-saving mutual funds and cover all the key information that you need to know.

ELSS funds are equity mutual funds that predominantly invest in stocks and equity-related instruments. They also offer tax benefits to investors under Section 80C of the Income Tax Act, where investments up to Rs. 150,000 are exempt from annual taxable income.

ELSS funds have a mandatory lock-in period of three years, making them a popular choice among taxpayers seeking to avail tax savings. Your investment in ELSS funds is eligible for a tax deduction of up to Rs. 150,000, and any income earned at the end of the three-year tenure is considered as Long-Term Capital Gain (LTCG) and taxed at a rate of 10% (if the income exceeds Rs. 1 lakh).

Here are some key characteristics of ELSS funds:

• 80% or more of the funds are invested in equity or equity-linked securities.
• The fund's equity investments are diversified across different sectors, market caps, and themes.
• While there is no limit to the length of investment, there is a mandatory lock-in period of three years.
• Investments in ELSS funds are eligible for tax deductions under Section 80C of the Income Tax Act.
• The income generated from ELSS funds is considered Long-Term Capital Gains (LTCG) and taxed as per the current tax laws.

ELSS Tax Saving Funds provide several advantages including:

• Diversification
  Most ELSS funds invest in a variety of companies with different market capitalizations and across various sectors, giving you the opportunity to diversify your investment portfolio.


• Affordability
  With a minimum investment as low as Rs.500, you can start investing in ELSS funds without having to accumulate a large sum of money.


• Flexibility
  While you can make a lump sum investment in ELSS, most investors prefer the SIP method as it allows them to invest regularly in small amounts and avail tax benefits while creating wealth over time.


• Long-term Investment
  You can stay invested in an ELSS scheme after the lock-in period of 3 years for as long as you want. However, the amount you can invest to avail of tax benefits* under Section 80C of the Income Tax Act is limited.

Before investing in ELSS Funds in India, it is important to consider both the scheme's performance over the past decade and the following factors:

• Investment and Tax Planning
  ELSS funds are unique in that they invest in the equity market while also offering tax benefits. However, tax planning should not be the sole consideration when investing in ELSS funds. It is essential to create an overall investment plan to achieve your financial goals, with tax planning being a part of that plan. ELSS funds can play an important role in achieving your long-term goals.


• SIP or Lump Sum Investment
  Many investors choose to invest in ELSS funds only for tax purposes, leading them to invest a lump sum amount at the last minute. This can be risky, especially if the market is high at the time of investment. A better approach would be to start a systematic investment plan (SIP) to average out the cost per unit over time.


• Recommended Investment Horizon
  Some young investors prefer ELSS funds over options like PPF or NSC due to the shorter lock-in period of 3 years. However, it is important to keep in mind that equity investments can take 5-7 years to stabilize and therefore, it is not advisable to keep a short-term investment horizon with ELSS funds.

There are two ways to invest in ELSS mutual funds:

Investing in ELSS Mutual Funds offline

For those wishing to invest in ELSS funds offline, they can contact a mutual fund distributor who can assist with filling out the forms, provide guidance on how to invest in ELSS funds, and collect investment cheques for deposit at the mutual fund company office. The distributor can also help with obtaining mutual fund KYC compliance if necessary and assist in selecting suitable ELSS mutual fund schemes.

Investing in ELSS Mutual Funds online

Investing in ELSS funds online can be done through three channels: the website of the Asset Management Company (AMC), the RTA website, or online mutual fund platforms. To invest online, the individual must first register on the website by providing their mobile number, email ID, and PAN number. Once the PAN number is entered, the website will automatically verify the individual's mutual fund KYC compliance status.

Note: To invest in ELSS funds, an individual must be KYC-compliant with mutual funds. This compliance can be obtained online through the website of a mutual fund company or the Registrar and Transfer Agent (RTA) website. The online KYC process is straightforward and requires a PAN card and proof of address such as an Aadhaar card, passport, utility bill, or government ID. The process also includes a video-based validation of the documents and photos.

For those who are KYC compliant, the investment process is straightforward. The individual can choose the scheme, plan (regular or direct), and option (dividend payout or growth) they want to invest in, and then decide whether they want to invest in a lump sum or through Systematic Investment Plans (SIPs). Payments can be made online from a bank account using the net-banking option.

It's important to note that not all online platforms offer both regular and direct plans, so the individual must choose a platform that offers the plan they want to invest in. The website of a mutual fund company usually allows investment in both plans, but the schemes will be limited to those offered by the AMC. RTAs, on the other hand, allow investment in both plans across the AMCs they service.

Before making any investment in ELSS funds, it's crucial to have a good understanding of selecting a suitable ELSS mutual fund scheme, determining the amount to invest, and the taxation and benefits associated with ELSS funds. To select a good mutual fund scheme, consider its performance compared to peers and its ability to beat the ELSS category average returns and benchmark returns over various time periods. The amount to invest in ELSS funds should be determined based on the individual's taxable income and taxes payable, with a maximum investment limit of Rs. 150,000 per financial year to avail of the tax benefit under Section 80C of The Income Tax Act 1961.

Despite having the shortest lock-in period among tax-saving options, many investors still question the possibility of breaking the 36-month holding period. The answer is simple - it cannot be done. You cannot withdraw from an ELSS fund before the 3-year period has passed.

However, if you are in need of funds urgently, taking out a loan against your ELSS investment is an option that may be of benefit to you. Unfortunately, this option is not widely known, but banks and non-banking financial companies (NBFCs) do offer loans against ELSS investments. The loan amount is typically equal to 60-70% of the investment's value, and the interest rate is low, around 10-11%¹.

ELSS funds offer two benefits in one investment product. Not only do they help reduce your tax burden, but they also provide the opportunity to build significant wealth. These funds can be used to achieve long-term financial goals, such as providing for a child's education or saving for retirement, where you need to outpace inflation by a significant margin.

In conclusion, ELSS mutual funds are a smart and efficient way to not only save on taxes but also create wealth over the long-term. With a minimum investment amount as low as Rs. 500, ELSS funds offer a wide range of benefits to investors looking to add diversity to their investment portfolios. The three-year lock-in period ensures that investors stay invested long enough to ride out market volatility and achieve their long-term financial goals. Additionally, a loan against ELSS investment is a viable option for those seeking immediate funds, which comes at low-interest rates and can be a lifesaver in times of financial need. Hence, it is advisable to carefully evaluate an ELSS scheme's performance over the past decade and create a comprehensive investment plan that includes tax planning before making an investment in ELSS funds.