Save Tax with These Best ELSS Funds
If you are new to the world of taxes and finance and are wondering how it is that you get a solid footing in both of these, then you have come to the right place. This article highlights the best ELSS funds that one can invest in order to save his or her tax.
So, what are ELSS Funds?
Equity Linked Saving Schemes (ELSS) or Tax Saving Mutual Funds schemes is a class of mutual funds that combine the dual benefits of wealth accumulation and tax deductions perfectly. The main features of this fund are –
- They have a short lock-in period of three years.
- The funds asset allocation i.e. nearly 65% of the portfolio is made towards equity linked securities.
- The exposure to fixed income securities is minimal.
- There is no option for premature exit.
- There is no upper limit for investing in ELSS, however, the lower limit varies from one fund house to the next.
- The investment can be done either through a SIP or in lumpsum. The former is preferred as one gets to purchase the units in tune with the fluctuations of the business cycle.
How do ELSS funds help save tax?
This fund provides for tax deductions of up to INR 1,50,000 a year under the provisions of Section 80C of the Income Tax Act, 1961. This results in a good sum of INR 46,800 being saved in taxes. For example, Brahmari has INR 2,50,000 as her disposable income at the end of the year and she invests INR2,00,000 in an ELSS scheme offered by a company. A sum of INR 1,50,000 will be eligible for deductions, decreasing the tax liability of Brahmari.
Top ELSS funds to invest in 2021
(S&P BSE 500 TRI)
ELSS category average
(Data as on March 8, 2021: Source: Value Research)
Considering just the top three funds, and understanding other specific performance indicators–
Name of the ELSS fund
Current value of the ELSS fund
Time taken for the fund to double
Axis Long Term Equity Fund
+17.48% per annum
Doubled in 4 years 2 months
Mirae Asset Tax Saver Fund
+21.93% per annum
Doubled in 1 year
Invesco India Tax Plan Fund
+16.6% per annum
Doubled in 4 years 3 months
(Source: ET Money)
Which fund is right for you?
While there is no standard answer to that question, the following things must be kept in mind when one has to pick an ELSS fund to invest in –
- Always go for No-Load Mutual Funds and pay attention to the expense ratio.
- It is important to consider the portfolio tilt of the fund i.e. the structure of investments of that specific scheme. This will determine the risk, return and time period that the investment has to stay locked in.
- The stocks’ concentration also makes a huge difference to the portfolio. For instance, too concentrated a portfolio might imply that even if a few stocks were to underperform, then the impact on the portfolio will be greater. Too diversified a portfolio will dilute the performance of its individual components and the fund will fail to meet the expectations.
- Compare the past performance of 3 year, 5 year and 7 year periods to understand how the fund has performed across fluctuations in market cycle and has coped with the same.
- Opt for SIP option to spread your investment across the cycle instead of investing a lump sum at the end of the year.
- Choose the growth option in ELSS schemes, to enjoy the power of compounding. If one goes for the dividend option instead, then it will be taxed by the investors as per their tax slabs.
- Choose direct plans for they have higher returns, lower expense ratios as the savings generated remains invested in the fund itself.
The decision to invest in ELSS funds should be taken in the context of your financial situation and goals. Even as the markets turn turtle, investors may continue in the market without exiting. For those who are wishing to invest, proceed with caution and learn everything there is to know about the scheme – after all investing your money makes sense only when you have invested enough time and effort into it first.