Benefits of Investing in ELSS Mutual Funds

You can avail a tax benefit on a maximum investment of Rs. 1.5 lakh in ELSS every year. Read more in the article.
EXPLORE FUNDS
Benefits of Investing in ELSS Mutual Funds
EXPLORE FUNDS
3 mins read
10-Apr-2024

Investing wisely is not just about growing your wealth; it is also about optimising your tax liabilities. Among the wide range of investment options available in India, very few offer as many advantages as ELSS. This unique financial instrument has the potential to deliver market-beating returns while simultaneously helping you reduce your income tax liability.

Continue reading to find out more about the ELSS tax benefits and the other advantages and drawbacks of this investment option.

What are ELSS funds?

The Equity-Linked Savings Scheme (ELSS) is a category of mutual funds that invests not less than 80% of their total assets in equity stocks and other equity-related instruments. Most ELSS funds are open-ended. This means that you can purchase the units from the respective Asset Management Company (AMC) at any point in time. When it comes to redemption, however, there are certain restrictions.

Benefits of Equity-Linked Savings Schemes

As an investor, understanding the various ELSS advantages is crucial. This can help you make more informed investment decisions in line with your investment objectives. Let us take a look at some of the key benefits of this investment option.

  • Potential for high returns
    Since ELSS mutual funds invest predominantly in the equity segment of the market, they have the potential to generate higher returns compared to other traditional tax-saving investment options like the Public Provident Fund (PPF) or National Savings Certificate (NSC) over the long term.
  • Tax benefits
    You can claim the investment you make in an Equity-Linked Savings Scheme as a deduction from your total income under Section 80C of the Income Tax Act, 1961 as per the income tax slabs of FY 2024-25. However, the maximum ELSS mutual fund tax benefit you can claim per financial year is limited to Rs. 1.5 lakh. This can help you lower your income tax liability significantly.
  • Systematic investment
    The Equity-Linked Savings Scheme offers the flexibility of making SIP Investments. Systematic Investment Plans (SIPs) enable you to invest a fixed amount regularly over a period of time. Such an approach to investing helps you reduce your overall cost of investment through rupee cost averaging and could potentially boost your returns through compounding.

When is the best time to invest in ELSS?

The ideal time to invest in ELSS is at the beginning of the financial year, provided the investment is through a Systematic Investment Plan. By investing fixed amounts regularly throughout the year, you can not only avail the benefit of rupee cost averaging but also mitigate the impact of market volatility more effectively.

Disadvantages of investing in ELSS mutual funds

Now that you are aware of the tax-saver mutual fund benefits, here is a brief overview of some of the key disadvantages of this investment option.

  • Lock-in period
    ELSS has a lock-in period of three years, during which you are disallowed from withdrawing your investments. Such a restriction can prevent you from accessing your funds during financial emergencies. However, it is important to note that the ELSS lock-in period of three years is the shortest compared to other tax-saving investments like NSC or PPF.
  • Market risk
    Since the Equity-Linked Savings Scheme invests predominantly in equities, it is subject to various market risks, such as volatility risk and capital loss risk. Additionally, the returns are also not guaranteed and instead are based on market conditions and the fund’s performance. This makes the ELSS more suitable for investors with high risk tolerances.

Equity-Linked Savings Scheme vs other tax-saving investments

ELSS’s advantages far outweigh the advantages of other investment options. Here is a brief comparison between the Equity-Linked Savings Scheme and other tax-saving investment options across different metrics.

Investment option

Lock-in period

Investment risk

Potential for returns

ELSS

3 years

High

High

Tax-Saver Fixed Deposits

5 years

Low

Low to Moderate

National Savings Certificate (NSC)

5 years

Low

Low to Moderate

Public Provident Fund (PPF)

15 years

Low

Low to Moderate

National Pension System (NPS)

Until retirement

Moderate

Moderate


As you can see, the lock-in period of ELSS is the shortest among all other tax-saving instruments. Although the investment risk is high, the potential for returns is also the highest with the Equity-Linked Savings Scheme.

Conclusion  

If you are looking to save taxes and create wealth over the long term, look no further than the Equity-Linked Savings Scheme. Tax benefits, a short lock-in period and the potential for high returns are some of the ELSS advantages that you get to enjoy when you invest in the fund. However, since the fund invests predominantly in the equity segment, it tends to have more risk. This is something that you need to consider before investing.

You can find some of the best ELSS mutual fund schemes on the Bajaj Finserv Mutual Fund Platform. The platform also offers a dedicated tool to compare mutual funds across different metrics to help you choose the right fund.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

What is the maximum amount of ELSS investment I can claim as a tax deduction?
You can claim ELSS investments up to Rs. 1.5 lakh per financial year as a deduction from your total income as per Section 80C of the Income Tax Act, 1961.
How do I claim the tax benefits offered by ELSS investments?
You can claim the amount of investment you make in an ELSS as a deduction from your total income at the time of filing your Income Tax Return (ITR). All you need to do is enter the amount of ELSS investment you made during the financial year in the ‘Part C - Deductions and Taxable Total Income’ section of the ITR. This will reduce your total income, and consequently, your income tax liability.
What are the disadvantages of ELSS?
Equity-Linked Savings Schemes have a few drawbacks, such as higher risk, no guarantee of returns and a lock-in period of 3 years. That said, ELSS has a plethora of benefits that far outweigh its disadvantages, making it a good investment option for investors with high risk tolerances.
Which is a better investment option: ELSS or fixed deposit?
Both Equity-Linked Savings Schemes and fixed deposits are attractive investment options catering to different kinds of investors. Since ELSS are market-linked, they have the potential to deliver high returns. However, it also makes them a more risky investment option. Fixed deposits, on the other hand, are less risky but generally deliver lower returns. It is advisable to consider factors such as your risk profile, investment horizon and objectives when deciding between the two.
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