Top 10 Best ELSS Tax Saving Mutual Fund

When it comes to smart investing, one of the best options to consider is the Equity Linked Savings Scheme (ELSS). These mutual funds not only offer the potential for higher returns but also provide significant tax benefits under Section 80C of the Income Tax Act. In this article, we will delve into the best ELSS mutual funds available in the market, helping you make an informed decision for your investments.

ELSS Tax Saving Mutual Fund

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What is ELSS?

An Equity Linked Savings Scheme (ELSS) is a mutual fund that invests predominantly in equities. ELSS funds come with a lock-in period of three years, which is the shortest among all tax-saving instruments under Section 80C. The dual benefit of wealth creation and tax savings makes ELSS a popular choice among investors.

Why Invest in ELSS?

• Tax Benefits: Investments up to ₹1.5 lakh per financial year in ELSS are eligible for tax deduction under Section 80C.
• Wealth Creation: With a significant portion invested in equities, ELSS funds have the potential to offer higher returns compared to traditional tax-saving instruments.
• Short Lock-in Period: ELSS has a lock-in period of just three years, which is shorter than other 80C options like the Public Provident Fund (PPF) and National Savings Certificate (NSC).

Advantages and Disadvantages of ELSS Funds

Advantages of ELSS Funds

1. Tax Benefits: Investments in ELSS funds qualify for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. Long-term capital gains (LTCG) from ELSS funds up to ₹1 lakh are tax-free. Gains above ₹1 lakh are taxed at a rate of 10%.
2. Higher Returns: ELSS funds invest primarily in equities, which have the potential to provide higher returns compared to traditional tax-saving instruments like PPF or NSC. Over the long term, equity investments have historically outperformed other asset classes, leading to significant wealth accumulation.
3. Short Lock-in Period: ELSS funds have a lock-in period of three years, the shortest among all tax-saving investment options under Section 80C. This provides liquidity earlier than other options like PPFs or FDs.
4. Diversification: ELSS funds invest in a diversified portfolio of stocks across various sectors and market capitalizations, reducing the risk associated with individual stocks.
5. Professional Management: ELSS funds are managed by experienced fund managers who make investment decisions based on thorough research and analysis, enhancing the potential for better returns.

Disadvantages of ELSS Funds

1. Market Risk: Since ELSS funds invest in equities, they are subject to market risks and can be volatile in the short term. The value of investments can fluctuate based on market conditions.
2. Lock-in Period: Although the three-year lock-in period is shorter compared to other tax-saving instruments, it still restricts access to your funds during this time. Investors cannot redeem their units before the lock-in period ends.
3. No Guaranteed Returns: Unlike fixed-income instruments like PPF or FDs, ELSS funds do not offer guaranteed returns. The performance of ELSS funds is linked to the equity market, which can be unpredictable.
4. Expense Ratio: ELSS funds charge an expense ratio for managing the fund, which can impact the overall returns. Choosing funds with a reasonable expense ratio is essential to maximize returns.
5. Tax on Gains: While LTCG up to ₹1 lakh is tax-free, gains above this threshold are taxed at 10%. This can reduce the net returns for investors with substantial investments.

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Top 10 Best ELSS Mutual Funds

Here are the top ELSS funds you should consider for your ELSS investment, along with their three-year return details:

1. Quant ELSS Tax saver Fund

• 3-Year Returns: 38.48%
• Performance: This fund has consistently delivered robust returns, making it a top choice for investors.
• Key Features: Focuses on high-quality businesses with sustainable growth potential.

2. Motilal Oswal ELSS Tax Saver Fund

• 3-Year Returns: 38.45%
• Performance: Known for its strong performance and stable returns over the years.
• Key Features: Diversified portfolio with a balance of large-cap, mid-cap, and small-cap stocks.

3. Quant ELSS Tax Saver Fund

• 3-Year Returns: 36.03%
• Performance: One of the oldest ELSS funds with a proven track record.
• Key Features: Focuses on a mix of value and growth stocks.

4. Bank of India ELSS Tax Saver Fund

• 3-Year Returns: 35.46%
• Performance: Offers a good balance between risk and return.
• Key Features: Invests in companies across market capitalizations with strong fundamentals.

5. JM ELSS Tax Saver Fund

• 3-Year Returns: 34.37%
• Performance: Consistently outperformed its benchmark.
• Key Features: Focuses on quality stocks with strong growth potential.

6. HDFC ELSS Tax Saver Fund

• 3-Year Returns: 33.22%
• Performance: Known for its disciplined investment approach.
• Key Features: Invests in companies with strong growth prospects and solid financials.

7. HSBC ELSS Tax Saver Fund

• 3-Year Returns: 31.21%
• Performance: A stable performer with a long-term growth outlook.
• Key Features: Invests in a blend of large-cap and mid-cap stocks.

8. DSP ELSS Tax Saver Fund

• 3-Year Returns: 30.30%
• Performance: Good track record with a diversified portfolio.
• Key Features: Focuses on high-conviction ideas across sectors.

9. Kotak ELSS Tax Saver Fund

• 3-Year Returns: 29.78%
• Performance: Known for its consistent performance and strong risk management.
• Key Features: Invests in high-quality growth-oriented companies.

10. Nippon India ELSS Tax Saver Fund

• 3-Year Returns: 29.60%
• Performance: Offers a balanced portfolio with good returns.
• Key Features: Focuses on sectors with long-term growth potential.

How to Choose the Best ELSS Fund?

When selecting an ELSS mutual fund, consider the following factors:

• Past Performance: Look at the historical returns of the fund over different time periods.
• Fund Manager’s Track Record: Evaluate the experience and track record of the fund manager.
• Portfolio Composition: Understand the types of stocks and sectors the fund invests in.
• Expense Ratio: Lower expense ratios can significantly impact your returns over the long term.
• Consistency: Choose funds that have consistently performed well across market cycles.

Who Should Invest in ELSS Mutual Funds

1. Salaried Individuals: When you are a salaried employee, there is a certain amount that goes towards the Employee Provident Fund (EPF) which is a fixed-income product. If one wants to balance out risk & return on their investment portfolio then ELSS is the best option. In addition to the upside of extraordinary returns, investments in ELSS are also eligible for tax deduction under section 80C. While other products like Unit Linked Insurance Plans (ULIPs) also offer tax benefits, they have a higher lock-in period & lesser return potential. For instance, ULIPs have a lock-in period of five years while PPF has a 15-year lock-in. ELSS Funds have the shortest lock-in period of only three years.
2. First-time Investors: If you are a new investor, ELSS is an ideal choice, since in addition to tax benefits you get a flavor of equity investing and mutual funds. Equity investing requires patience and discipline to stay invested for the long term. Investors often lack this discipline and pull out of equity investments due to short-term fluctuations in the fund’s performance caused by equity market movements. The lock-in ensures that the investor stays invested for the long term. Like all equity investments, you can invest in ELSS through SIP, which ensures regular investing. SIP helps in rupee cost averaging. Through SIP you accumulate more units when the market is in red and this benefits you when the markets turn favorable. Read our blog on Why ELSS should be your first Mutual fund? to understand the benefits in detail.

Taxation on ELSS Funds

Capital gains from ELSS get the same treatment in Income Tax Calculation as the rest of the Equity Instruments. Short-term capital gains (STCG) attract a tax of 15%, while Long Term Capital gains (LTCG) are only taxable if the gains exceed. 1 lac during the financial year. LTCG attracts a tax of 10% on the amount exceeding? 1 lac. Read ETMONEY’s blog on How Mutual Fund Investments are taxed to understand the taxation in detail.

Conclusion

Investing in the best ELSS funds can be a smart move to not only save on taxes but also to grow your wealth over time. By carefully evaluating the options listed above and aligning them with your financial goals, you can make informed decisions and maximize your returns.

Remember, every investment carries some risk, and it’s important to review your portfolio periodically and make adjustments as needed. Happy investing in ELSS schemes!

FAQs

1. What is an ELSS mutual fund?

An Equity Linked Savings Scheme (ELSS) is a type of mutual fund that invests primarily in equities or equity-related instruments. It comes with a lock-in period of three years, during which the investment cannot be redeemed. ELSS funds offer tax benefits under Section 80C of the Income Tax Act, making them an attractive option for tax-saving and wealth creation.

2. How does the tax benefit work for ELSS funds?

Investments in ELSS mutual funds are eligible for a tax deduction of up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act. This means you can reduce your taxable income by the amount invested in ELSS, up to the specified limit, thereby saving on taxes. The returns earned from ELSS are also subject to capital gains tax.

3. What is the lock-in period for ELSS funds?

ELSS funds have a lock-in period of three years, which is the shortest among all tax-saving instruments under Section 80C. During this period, investors cannot redeem their units. After the lock-in period, investors have the flexibility to redeem their investment or continue to hold it for potential long-term gains.

4. Are ELSS funds risky?

As ELSS funds invest primarily in equities, they are subject to market risks and can be volatile in the short term. However, due to the three-year lock-in period, investors are encouraged to take a long-term perspective, which can help mitigate short-term volatility. Historically, equity investments have the potential to offer higher returns over the long term compared to other asset classes.

5. How to choose the best ELSS fund?

When selecting an ELSS mutual fund, consider factors such as:

• Past Performance: Review the fund’s historical returns over different time periods.
• Fund Manager’s Track Record: Evaluate the experience and track record of the fund manager.
• Portfolio Composition: Understand the types of stocks and sectors the fund invests in.
• Expense Ratio: Lower expense ratios can significantly impact your returns over the long term.
• Consistency: Choose funds that have consistently performed well across market cycles.

Dev Kirtonia

Hi, I’m Dev Kirtonia, Founder & CEO of Dev Library. A website that provides all SCERT, NCERT 3 to 12, and BA, B.com, B.Sc, and Computer Science with Post Graduate Notes & Suggestions, Novel, eBooks, Biography, Quotes, Study Materials, and more.