How to Invest in ELSS Mutual Funds

The simplest method is by using an Online Investment Services Account. You have the option to invest a lump sum or through SIP. Tax benefits are limited to INR 1.5 lakh, but you can invest any amount you wish.
How to Invest in ELSS Mutual Funds
3 mins read
05-June-2024

Equity Linked Savings Schemes (ELSS) mutual funds are tax-saving investment instruments in India. They invest primarily in equities, offering potential capital appreciation along with tax benefits under Section 80C of the Income Tax Act. ELSS funds have a lock-in period of three years, promoting long-term wealth creation while reducing tax liabilities.

These mutual funds present a smart way to grow wealth while enjoying tax benefits. This guide will help you understand the basics of investing in ELSS mutual funds, ensuring both financial growth and tax efficiency.

Maximising tax is a crucial aspect of financial planning. Among various options, ELSS stand out as a compelling avenue for individuals seeking to grow their wealth while enjoying tax advantages under Section 80C of the Income Tax Act. This article will help you understand the basics of investing in ELSS mutual funds. Offering insights into their features, benefits, and the step-by-step process of investment.

ELSS funds, characterised by their equity exposure and relatively short lock-in period of three years, present an attractive proposition for both seasoned investors and beginners alike.

What are ELSS Mutual Funds?

ELSS, or Equity Linked Savings Scheme, is a type of mutual fund investment plan offering tax benefits under Section 80C of the Income Tax Act, 1961. ELSS primarily invests in equities and equity-related instruments, making it ideal for tax-saving and wealth-building purposes.

Steps to invest in ELSS Mutual Funds

Here are the steps to start investing in ELSS mutual funds:

  1. Fund selection: Begin by choosing an Equity Linked Savings Scheme (ELSS) fund that aligns with your financial objectives and risk appetite.
  2. KYC process: Complete the KYC (Know Your Customer) formalities either through a registered mutual fund distributor or an online platform recognised by the mutual fund industry.
  3. Specific fund selection: Once your KYC is completed, select the particular ELSS fund in which you intend to invest based on your research and investment strategy.
  4. Determine investment amount: Decide on the amount you wish to invest in the ELSS fund and choose between a lump sum investment or setting up a Systematic Investment Plan (SIP).
  5. Document submission: Provide the required documents such as your PAN card and Aadhar card to comply with regulatory requirements.
  6. Application form: Fill out the application form for the selected ELSS fund, ensuring accuracy and completeness of the information provided.
  7. Payment method: Transfer the chosen investment amount through a bank transfer or online payment method as per the instructions provided by the mutual fund.
  8. Acknowledge lock-in period: Understand and acknowledge the lock-in period associated with ELSS investments, which is typically three years from the date of investment.
  9. Monitoring investments: Keep a close eye on your ELSS investments, monitoring their performance and reviewing them periodically to ensure they are aligned with your financial goals.
  10. Redemption decision: After the completion of the lock-in period, evaluate your investment performance and decide whether to redeem your investment or continue to stay invested based on your financial objectives and market conditions.

Features and benefits of ELSS mutual funds

  • Tax saving: ELSS investments are eligible for tax deduction under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs per annum. This tax benefit reduces the taxable income, helping investors save on taxes while building wealth for the future.
  • Equity exposure: ELSS funds allocate at least 80% of their assets in equity and equity-related instruments. This exposure to the equity market offers the potential for higher returns over the long term, making ELSS an attractive option for investors seeking capital appreciation.
  • Lock-in period: ELSS investments come with a mandatory lock-in period of three years. While this may restrict liquidity in the short term, it encourages investors to adopt a long-term investment horizon, aligning with the objective of wealth creation through disciplined investing.
  • Diversification: ELSS funds invest in a diversified portfolio of equity stocks across different sectors and market capitalizations. This diversification helps mitigate risk by spreading investments across various assets, reducing the impact of volatility in any single sector or stock.
  • Liquidity: Despite the lock-in period, ELSS funds are open-ended mutual fund schemes. This means that investors have the flexibility to redeem their units after the completion of the lock-in period, providing liquidity when needed.
  • Systematic Investment Plan: Investors can opt for SIPs to make disciplined investments in ELSS funds. SIPs allow investors to invest a fixed amount at regular intervals, helping inculcate a habit of regular saving and investing while benefitting from the power of compounding over time. SIPs also offer rupee cost averaging, enabling investors to buy more units when prices are low and fewer units when prices are high, thereby reducing the average cost per unit and potentially enhancing returns over the long term.

Read more: What is portfolio diversification.

Taxation Rules of ELSS Funds

Equity Linked Saving Schemes (ELSS) are popular for their growth potential, but their tax benefits are equally attractive. Here's a breakdown of the key taxation rules:

Tax Savings under Section 80C:

  • Beyond tax-free LTCG, ELSS investments offer an additional tax advantage – a deduction under Section 80C of the Income Tax Act.
  • This deduction applies to the initial investment amount you contribute to your ELSS scheme. It's a "cumulative" benefit, meaning you can claim up to Rs. 1.5 Lakh in tax deductions on your total contributions towards various Section 80C options like ELSS, PPF, NSC, etc.

Taxation on LTCG Exceeding Rs. 1 Lakh:

  • While the first Rs. 1 Lakh of LTCG from ELSS is tax-free, any gains exceeding this limit are subject to a 10% tax.
  • It's important to note that ELSS LTCG calculations don't benefit from indexation. Indexation adjusts the purchase price of your investment for inflation, potentially reducing your taxable capital gains. Without indexation, the tax liability on profits above Rs. 1 Lakh might be slightly higher.

Advantages of Equity Linked Savings Scheme (ELSS)

ELSS presents various advantages, rendering it an appealing investment avenue. Notably, its brief 3-year lock-in period stands in stark contrast to the lengthier lock-ins of other schemes like NSC and PPF. This flexibility caters well to short-term investors, distinguishing ELSS from many other mutual fund alternatives.

Furthermore, ELSS offers tax benefits under Section 80C of the Income Tax Act, 1961, for investments up to Rs. 1.5 lakhs, coupled with the potential for capital growth, enhancing its overall tax advantage.

Given its focus on equity-oriented instruments, ELSS holds the potential for substantial returns, particularly during favorable market conditions, reflecting its appeal for investors seeking growth opportunities.

ELSS provides investors with two fund options: growth fund and dividend fund. The growth fund disburses a lump-sum amount after the 3-year lock-in, while the dividend option offers periodic payouts during the lock-in period.

Moreover, ELSS features a low minimum investment threshold, starting from Rs. 500. This accessibility makes it especially appealing for individuals with lower taxable income or those initiating their investment journey.

Disadvantages of Investing in ELSS

Investing in Equity Linked Savings Schemes (ELSS) offers various advantages, but it's essential to consider the potential drawbacks as well. Here are some disadvantages of investing in ELSS:

  • Market risk: ELSS invests predominantly in equity and equity-related instruments, making it susceptible to market fluctuations and volatility. While equities have the potential to offer higher returns over the long term, they also carry higher risk compared to debt instruments. Investors should be prepared for the possibility of fluctuations in the value of their investments, especially during periods of market downturns.
  • Uncertain returns: Unlike fixed-income investments such as fixed deposits or bonds, the returns from ELSS are not guaranteed. The performance of ELSS funds depends on the performance of the equity markets and the fund manager's investment decisions. Investors may experience fluctuations in returns, and there is no assurance of achieving the desired investment objectives or target returns.
  • Limited investment options: ELSS funds primarily invest in equities and equity-related instruments, which may not suit every investor's risk profile or investment preferences. Investors looking for a more conservative or diversified investment approach may find the concentrated equity exposure of ELSS funds unsuitable for their investment needs.

Read more: What is market risk

Comparison of ELSS vs. ULIP vs. NPS

This table compares Equity Linked Saving Schemes (ELSS), Unit Linked Insurance Plans (ULIPs), and National Pension System (NPS) to help you choose the right investment option for your financial goals and tax-saving needs:

Feature

ELSS

ULIP

NPS

Investment Type

Equity Mutual Fund

Insurance & Investment Combined

Pension Scheme

Primary Objective

Wealth Creation & Capital Appreciation

Wealth Creation with Life Insurance Cover

Retirement Planning & Corpus Building

Lock-in Period

3 years

5-10 years (policy dependent)

Up to retirement (with limited withdrawal options)

Tax Benefits

Deduction under Section 80C (up to Rs. 1.5 Lakh), Tax-free LTCG up to Rs. 1 Lakh

Deduction under Section 80C (up to Rs. 1.5 Lakh), Maturity proceeds may be partially tax-free

Deduction under Section 80CCD(1) (up to Rs. 1.5 Lakh), Partial withdrawal at maturity tax-free

Liquidity

High (after lock-in period)

Low (limited withdrawal options before policy term)

Very Low (locked until retirement)

Risk

High (Equity Market Volatility)

Moderate (Depends on chosen investment fund within ULIP)

Low (Exposure to Government Bonds)

Returns

Potentially High Returns

Moderate Returns

Moderate Returns

Investment Flexibility

High (Multiple Fund Options)

Moderate (Fund switching allowed within ULIP)

Limited (Investment strategy chosen at enrollment)

Suitability

Long-term Investors with high risk tolerance & growth goals

Investors seeking wealth creation with some life cover

Individuals seeking long-term retirement corpus with tax benefits pen_spark

 

How to invest in ELSS mutual funds on Bajaj Finserv platform

Investing in ELSS mutual funds on the Bajaj Finserv platform is quite simple and hassle-free. Follow these steps to start your SIP investment journey:

Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store

Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page

Step 3: Click on 'Mutual Funds' icon

Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page

Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list

Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating

Step 7: Click on 'Invest Now'

Step 8: Enter your mobile number and sign in using the OTP

Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video

Step 10: Enter your bank account details

Step 11: Upload your signature and provide some additional details to continue

Step 12: Choose and select the mutual fund that you want to invest in

Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’

Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS

Step 15: Once your payment is done, the investment will be complete

Your investment will start reflecting in your portfolio within 2-3 working days.

Conclusion

By choosing the right ELSS funds and maintaining a long-term perspective, investors can achieve their financial goals while enjoying tax benefits. It is crucial to research and select ELSS funds carefully, staying informed about market trends to make informed investment decisions.

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

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Frequently asked questions

How do I deposit money into ELSS mutual fund?

Deposit funds into ELSS mutual funds via online platforms, mobile apps, or directly through the fund house. Choose your preferred mode, fill out necessary forms, and transfer funds accordingly.

Is ELSS mutual fund taxable after 3 years?

Yes, ELSS mutual funds are subject to capital gains tax after 3 years. However, gains up to Rs. 1 lakh annually are exempt from tax under Section 80C of the Income Tax Act.

Are returns from ELSS mutual funds tax-free?

Yes, returns from ELSS mutual funds are tax-free. However, capital gains exceeding Rs. 1 lakh in a financial year are subject to long-term capital gains tax at 10%.

What is the average return on ELSS mutual fund?

The average return on ELSS mutual funds varies based on market conditions and fund performance. Historically, ELSS funds have provided returns ranging from 12% to 15% annually over the long term.

Can I invest in 2 ELSS mutual funds?

Yes, you can invest in multiple ELSS mutual funds to diversify your portfolio and spread risk. However, ensure that your investment choices align with your financial goals and risk tolerance.

Is ELSS good or not?

ELSS mutual funds offer potential for high returns along with tax benefits under Section 80C. They are suitable for investors seeking wealth accumulation through equity investments with a lock-in period of 3 years and tax savings alongside.

Can I invest 1 lakh in ELSS?

Yes, you can invest up to Rs. 1.5 lakhs in ELSS to avail maximum tax benefits under Section 80C of the Income Tax Act. Essentially there is no maximum limit for investing in ELSS mutual funds.

Who should not invest in ELSS?

Individuals with a low-risk tolerance or those seeking short-term liquidity should avoid ELSS due to its equity exposure and three-year lock-in period.

What are the disadvantages of ELSS?

ELSS carries market risk, and its returns are not guaranteed. Additionally, the three-year lock-in period restricts liquidity, and returns may fluctuate based on market performance.

Do I need a demat account for ELSS?

No, a demat account is not necessarily required for investing in ELSS. Investors can purchase ELSS units directly through mutual fund companies or online platforms without the need for a demat account.

Does ELSS give negative returns?

ELSS can experience negative returns, especially during market downturns, as they primarily invest in equity instruments which are subject to market volatility. However, negative returns are not guaranteed and vary based on market conditions.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.