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What is ELSS Mutual Funds 2024?
ELSS fund or equity linked savings scheme allocates 80% of its assets to equity and equity linked securities and it also has exposure to fixed income securities. What sets it apart from other mutual fund schemes is its 3year lock in period.
It stands as the sole type of mutual fund qualifying for tax deductions under Section 80C of the Income Tax Act, 1961. This allows you to claim a tax rebate of up to ₹1,50,000.
ELSS dividends can be reinvested (under growth option) or distributed to investors (under dividend option).
Features of ELSS Mutual Funds
- It may have slightly lower returns than small-cap funds but beats other tax-saving options like PPF and NPS Etc.
- By allocating funds to ELSS, individuals or Hindu Undivided Families (HUF) can reduce taxable income by up to ₹1.5 lakh. This implies that investing ₹1.5 lakh in a year in an ELSS allows for a tax rebate of up to ₹46,800 for that year, investments exceeding ₹150,000 do not contribute to additional tax deductions.
- ELSS funds primarily focus on equity investments, although they may include minor allocations to debt. Investors have the flexibility to choose between systematic investment plans (SIP) or lump-sum investments when participating in ELSS.
- ELSS schemes come with a lock-in period of approximately 3 years, providing investors with a stable investment horizon.
- Higher Return: ELSS mutual funds, especially the best ones, can offer higher returns compared to provident funds, pension funds, or post office saving schemes. This is because ELSS funds invest in high-risk, high-return assets like stocks, unlike fixed-income options such as bank deposits or PPF. As stock prices rise, ELSS funds can provide higher returns for investors due to the fluctuating Net Asset Value (NAV).
- Shorter lock-in period: ELSS funds have a 3-year lock-in, the shortest among tax-saving options. Compared to PPF's 15-year maturity, tax-saver funds are more liquid.
- ELSS Tax Benefits: ELSS is a great way for investors to save on taxes and earn better returns compared to a savings account.
- Market Risk: Investors losing money because the market isn't doing well. This can happen due to things like economic downturns, political issues, or changes in market mood. For Equity Linked Savings Schemes (ELSS), they must put at least 80% of their money in stocks. So, if the stock market isn't doing well, it affects ELSS funds too. It might become tricky to buy or sell stocks at the right time. Remember this when thinking about ELSS investments.
- Liquidity Risk: If a fund invests a lot in stocks that are hard to buy or sell because there aren't enough people interested, it can be a problem because there's a risk of not being able to trade stocks at the right time. ELSS funds have a three-year lock-in period, meaning investors can't withdraw or transfer their investment during this time. Additional risks arise if the fund mainly invests in small-cap companies, increasing the risk of losing capital. Consider these factors before investing.
Who Should Invest in ELSS Mutual Funds?
- Who Wants to Save Tax: ELSS mutual funds offer tax savings of up to Rs. 46,800 annually. While riskier than fixed deposits or the National Pension Scheme, they provide variable returns, ranging from negative to over 30% per year.
- Long Term Investors: ELSS funds have a three-year lock-in period, requiring investors to stay committed. Continuing beyond this period ELSS funds provide better returns if you hold for the long term.
- Salaried People: As a salaried employee, a portion of your income goes to the fixed-income product, Employee Provident Fund (EPF). To balance risk and return in your investment portfolio, consider ELSS. It offers the potential for extraordinary returns and qualifies for a tax deduction under section 80C. Compared to other products like Unit Linked Insurance Plans (ULIPs), ELSS has a shorter lock-in period of three years, providing a more flexible investment option. ULIPs, with a lock-in period of five years, and PPF, with a 15-year lock-in, come with higher periods and potentially lower returns.
- For New Investors: For new investors, ELSS is an excellent choice, offering tax benefits and exposure to equity investing and mutual funds. Patience and discipline are crucial in equity investing, investors compromised higher returns by short-term market fluctuations. ELSS's lock-in period encourages long-term commitment, mitigating impulsive decisions. Utilizing SIP in ELSS allows for regular, disciplined investing. Investing more when the market is down benefits you when it turns favorable.
Lock-in period
ELSS funds have a three year lock in period, meaning investments can’t be redeemed before three years. Investors should be aware of this and plan accordingly.
Desire Return
ELSS funds don’t guarantee returns as they depend on how well the underlying investments perform. Investing for a longer time may bring bigger returns compared to other tax saving options. Remember, ELSS invests in stocks, so there are risks like market volatility that could affect prices.
Investment Time
For ELSS funds, aim for a longer investment horizon, possibly over five years to manage market fluctuations due to their equity exposure.
| Company Name | Fund Size (in Cr.) | Risk | Rating | 1Y Returns | 3Y Returns | 5Y Returns |
|---|---|---|---|---|---|---|
Quant Tax Plan Direct Growth | ₹5,614 | Very High Risk | 5* | 25.79% | 34.96% | 30.25% |
Quant ELSS Tax Saver Fund Direct Growth | ₹6,416 | Very High Risk | 5* | 32.37% | 33% | 31.35% |
Bandhan Tax Advantage (ELSS) Direct Plan Growth | ₹5,160 | Very High Risk | 5* | 16.83% | 28.88% | -18.62% |
Bandhan ELSS Tax Saver Fund Direct Plan Growth | ₹5,748 | Very High Risk | 5* | 29.66% | 25.39% | 21.38% |
Parag Parikh Tax Saver Fund Direct Growth | ₹2,137 | Moderately High Risk | 5* | 23.82% | 24.64% | NA% |
Parag Parikh ELSS Tax Saver Fund Direct Growth | ₹2,563 | Moderately High Risk | 5* | 26.53% | 22.63% | NA% |
Kotak ELSS Tax Saver Fund Direct Growth | ₹4,691 | Very High Risk | 5* | 23.93% | 20.61% | 19.37% |
Bank of India Tax Advantage Direct-Growth | ₹951 | Very High Risk | 4* | 36.34% | 24.97% | 24.76% |
SBI Long Term Equity Fund Direct Plan Growth | ₹18,714 | Very High Risk | 4* | 41.76% | 24.88% | 20.53% |
Bank of India ELSS Tax Saver Direct Growth | ₹1,040 | Very High Risk | 4* | 36.75% | 23.88% | 25.03% |
Mahindra Manulife ELSS Fund Direct Growth | ₹658 | Very High Risk | 4* | 16.38% | 23.75% | 17.14% |
Motilal Oswal ELSS Tax Saver Fund Direct Growth | ₹2,921 | Very High Risk | 4* | 40.96% | 23.45 | 19.99% |
DSP Tax Saver Direct Plan Growth | ₹11,693 | Very High Risk | 4* | 19.13% | 23.19% | 19.05% |
DLP ELSS Tax Saver Direct Plan Growth | ₹13,583 | Very High Risk | 4* | 28.62% | 21.79% | 20.50% |
Mirae Asset Tax Saver Fund Direct Growth | ₹18,842 | Very High Risk | 4* | 19.89% | 21.16% | 20.36% |
For Dividend Taxation
ELSS dividends are part of taxable income, taxed based on the investor’s income bracket. A 10% TDS applies if dividends exceed ₹5000 in a financial year.
For Capital Gains Taxation
ELSS has a minimum lock in period of 3 years, all capital gains are considered long term. Gains above ₹1 lakh from ELSS unit redemption incur a 10% LTCG tax rate.
How to select best ELSS Mutual 2024 for tax saving?
In 2023, India has over 40 ELSS funds, making it tough to choose the right one for your portfolio. Avoid picking based on popularity, short term performance or NAV. Instead, focus on consistent performance by evaluating funds on both quantitative and qualitative aspects.
Past Performance
Investing in ELSS aims to grow wealth by diversifying across various stocks and sectors. Analyzing a scheme’s past performance is essential for setting realistic expectations but don’t rely too heavily on it when shortlisting. Past performance doesn’t guarantee future results. Use historical returns to gauge how consistently the scheme has performed in the past.
Compare with Category Peers and Benchmark Index
Check how well the scheme has done compared to its benchmark and peers over different time periods like 1year, 3year, 5year, 7year,and since inception. Remember, no ELSS stays a top performer every year due to unique strategies. Evaluate past performance to see if the fund consistently performed well. If a fund lacks a long term track record or has a one-time good performance, it might be wise to overlook it.
Evaluate Fund Performance in Market Cycles
ELSS funds often excel in rising markets but in downturns, some may struggle. It’s crucial to choose schemes that consistently perform well in both bullish and bearish market conditions compared to benchmarks and peers.
Risk Adjusted Better Returns
ELSS funds, being mainly in stocks, face market ups and downs. A fund manager can help manage this volatility using effective risk-management techniques. To assess if a fund gives good returns for its risk, check its Standard Deviation (higher means more volatility), Sharpe ratio (higher is better for risk-adjusted return) and Sortino ratio (higher shows better downside risk control).
Fund Manager
ELSS performance relies on the fund manager’s skill in identifying market opportunities. Check the manager’s qualifications, experience and track record with other schemes. Also, consider the number of schemes they handle. If a manager oversees too many (more than five), it may lead to inefficiencies. So, ensure a manageable workload for optimal performance.
ELSS Funds (in ₹ Cr.) : Assets Under Management (AUM) Growth
Values in ₹ (Cr.)
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Final Words
After choosing the best ELSS mutual funds for tax savings and wealth growth be patient and give your investments time to perform. Consider staying invested beyond the three year lock in period for maximum returns and achieving financial goals. Avoid timing the market even in short term uncertainty, ELSS can reward investors in the long run. Opt for the SIP route to minimize the impact of volatility and benefit from compounding wealth.
