ELSS Mutual Funds – Multiple Benefits

ELSS Mutual funds are popularly Called in short form as ELSS funds. They are also used as a synonym of Tax Saving Funds. March is the time of the year when most investors look for these funds to avail tax benefits. Although there is no wrong with saving tax, that should not be only criteria to invest in ELSS Mutual Funds.  These funds should be viewed like any other investment option.

What are ELSS Mutual Funds ?

ELSS Mutual Funds are diversified mutual fund schemes (Open ended) which invest across sectors and stocks of large, medium and small cap.  For availing tax benefits, investments in these schemes are locked for 3 years. This is the smallest lock in period compared to other tax saving options like PPF (Upto 15 years), Bank Fixed Deposit (5 Years).

What are the tax benefits in ELSS Mutual Funds Investments?

Investments in these funds are eligible for tax exemption under Section 80C of Income Tax 1961.  Maximum amount admissible under this section is a maximum of 1,00,000 rupees.

All equity investments with an investment period of 1 year and above are completely exempted from paying Capital Gains Tax.  As these funds have a lock in period of 3 years , they are eligible for complete tax exemption of capital gains earned.

Dividends distributed under ELSS schemes are exempted from paying Dividend Distribution Tax in the hands of investors.

Although ELSS funds are open ended, lock in period of 3 years apply for availing tax benefits. The minimum amount that can be invested is 500 rupees (In other mutual fund schemes minimum is 5000 rupees).

To be eligible for Long Term Capital Gains Tax exemption, minimum 65% of funds need to be invested in equities and related products.  ELSS schemes usually invests in between 80-100% in equities.  As we are aware, equity investments are highly volatile in short term and can cause capital loss too. This indicates ELSS Mutual funds investment may not be best investment option for all investors though they offer multiple advantages.  At the same time it should be appreciated that equities as an asset class provide highest inflation adjusted returns if invested for long term.

Investments in ELSS schemes can be done either in lumpsum or through systematic investment plan (SIP). It is advisable to opt for SIP to invest in ELSS Mutual Funds and not to rush to invest in Feb or Mar just to save tax.

ELSS Mutual Funds Performance

 Please note that above comparison is for illustration purpose only.  There were Negative Returns in many of the ELSS funds during last 3-4 years. As Mutual fund investments are subject to market risks, please read all offer related documents carefully before investing.  There is no guarantee that past performance is repeated in future too.

The bottom line is while investing in ELSS Mutual Funds,

1)  Spread your investments through Systematic Investment Plans possibly through out the year and do not rush to invest just to save tax. Remember ELSS scheme should also be viewed as an investment with its pros and cons.

2) Equity investments are highly volatile and in short term risky too. Plan to hold your investment for longer periods. Keep invested even after lock in period of 3 years.

3) Invest in ELSS funds with long term goals like child education, your dream home etc. It makes a purpose to keep invested

4) As dividend and growth options are available for investment, choose your option wisely. For long term wealth generation, growth plan is best

5) Do not invest funds which you may required before 3 years. These are locked in for 3 years to avail tax benefits.