How to Invest in ELSS Mutual Funds

Investing in Equity Linked Savings Schemes (ELSS) funds is a smart way to grow your wealth while enjoying tax benefits in India. ELSS funds are a category of mutual funds that combine the potential for high returns with the advantage of tax savings under Section 80C of the Income Tax Act. This article will help you learn “How to invest in ELSS Mutual Funds” and ensure both financial growth and tax efficiency.

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What is ELSS?

The full form of ELSS is Equity Linked Savings Scheme. This type of mutual fund investment plan in India offers tax benefits under Section 80C of the Income Tax Act, 1961.

ELSS mutual funds primarily invest in equities and equity-related instruments. This makes them the best investment options for tax-saving and wealth-building.

Steps to Invest in ELSS Mutual Funds

Follow the steps mentioned below to start investing in an Equity Linked Savings Scheme (ELSS):

  • Choose a Fund: Select an ELSS fund based on your financial goals and risk tolerance.

  • KYC Process: Complete the KYC (Know Your Customer) formalities with a registered mutual fund distributor or online platform.

  • Fund Selection: Pick the specific ELSS fund in which you want to invest.

  • Investment Amount: Decide on the investment amount and payment method, either lump sum or SIP.

  • Submit Documents: Provide necessary documents, such as PAN card and Aadhar card.

  • Fund Application: Fill out the application form for the chosen ELSS fund.

  • Payment: Invest the desired amount through a bank transfer or online payment.

  • Lock-in Period: Understand and acknowledge the 3-year lock-in period for ELSS investments.

  • Monitor Investments: Keep track of your investments and review them periodically.

  • Redeem or Stay Invested: After the lock-in period, decide whether to redeem or continue your investment.

Features of ELSS Mutual Funds

The key features of Equity Linked Savings Scheme (ELSS) mutual funds are listed below:

  • Types of ELSS Investment: Under ELSS mutual funds, you have two options for investment-

    • Dividend Option: During the lock-in period of 3 years, a fixed amount is paid in instalments to you

    • Growth Option: A lump-sum amount is paid to you after the completion of the lock-in period

  • Tax Saving: ELSS investments are eligible for tax deduction under Section 80C of the Income Tax Act, 1961, up to a limit of Rs. 1.5 lakhs per annum.

  • Equity Exposure: ELSS mutual funds invest at least 80% of their assets in equity and equity-related instruments. This gives you the potential to earn higher returns over the long term.

  • Lock-in Period: These tax-saving mutual funds have a mandatory lock-in period of three years. This means that you cannot withdraw your money from the ELSS mutual fund before the completion of three years.

  • Diversification: ELSS funds invest in a diversified portfolio of equity stocks across different sectors and market capitalizations. This helps to reduce risk and improve the chances of generating better returns.

  • Liquidity: These are open-ended mutual fund schemes. This means that you can redeem your units at any time after the completion of the lock-in period.

  • Systematic Investment Plan (SIP): You can also opt for a Systematic Investment Plan (SIP) to make an investment in the ELSS mutual fund scheme. SIP allows you to make a disciplined investment in ELSS mutual funds and gain long-term returns on investment. You can also use a SIP Calculator to estimate your returns from the SIP plan.

Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax

Advantages of Equity Linked Savings Scheme (ELSS)

ELSS offers several advantages that make it an attractive investment choice. Some of the benefits of the ELSS scheme are as follows:

  1. Short 3-Year Lock-In Period

    ELSS has a relatively short lock-in period of just 3 years in comparison to the National Savings Certificate (NSC) and Public Provident Fund (PPF), which have lock-in periods of 6 and 15 years, respectively. This flexibility makes it suitable for short-term investors and is notably shorter than most other mutual fund options.

  2. Tax Benefits

    Investments in ELSS, up to Rs. 1.5 lakhs qualify for tax benefits under Section 80C of the Income Tax Act, 1961. Additionally, ELSS offers the potential for capital growth, which enhances the overall tax advantage for you.

  3. Potential for High Returns

    ELSS predominantly invests in equity-oriented instruments, providing the potential for substantial returns, especially when the stock market performs well. A well-constructed portfolio can yield significant returns when the economy is on the rise.

  4. Dividend and Growth Options

    ELSS offers you with two fund options: growth fund and dividend fund. In the growth fund option, you receive a lump-sum amount after the 3-year lock-in period. Alternatively, in the dividend option, fixed amounts are paid to you in instalments during the lock-in period.

  5. No Minimum Investment Limit

    ELSS has a low minimum investment requirement, starting as low as Rs. 500. This accessibility makes it a viable option when you have lower taxable income or when you are looking to start building your portfolios as a young investor.

Comparison of ELSS vs. ULIP vs. NPS

The following table shows you the key differences between an Equity Linked Savings Scheme (ELSS), Unit Linked Insurance Plan (ULIP), and National Pension Scheme (NPS):

Feature ELSS ULIP NPS
Nature of Investment Equity-oriented mutual fund Combination of insurance and investment funds Mix of equity, fixed deposits, and liquid funds
Lock-in Period 3 years 5 years Until retirement or 60 years (whichever is earlier)
Tax Benefits Tax deduction under Section 80C Tax benefits under Sections 80C and 10(10D) Tax benefits under Sections 80CCD(1), 80CCD(2), and 80CCD(1B)
Risk Level High Medium to High Low to Medium
Flexibility Liquidity after the lock-in period Partial withdrawals after the lock-in period Partial withdrawals allowed, but with restrictions
Returns Market-linked, potential for high returns Variable, depends on market performance and insurance costs Market-linked, returns depend on the fund performance
Insurance Component No Yes No
Pension Features No No Yes
Suitability Investors seeking tax-saving with high risk tolerance Individuals looking for a combination of insurance and investment Long-term retirement planning with moderate risk tolerance
Liquidity Locked-in for 3 years Partial withdrawals allowed after lock-in Allowed with certain conditions after 3 years of NPS account
Market Dependency Depends on equity market Linked to market performance Linked to market performance
Nature of Investment Equity-oriented mutual fund Combination of insurance and investment Mix of equity, fixed deposits, and liquid funds

In Conclusion

Investing in ELSS mutual funds offers a tax-efficient and potentially lucrative opportunity to build wealth while saving on taxes. By investing in ELSS funds through SIPs, you can benefit from the power of equities while enjoying the benefits of tax deductions under Section 80C of the Income Tax Act. It is essential to research and select ELSS funds that align with your risk tolerance and financial objectives, maintain a long-term perspective, and stay informed about market trends to make informed investment decisions.

FAQ's

  • What are ELSS funds?

    ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund that invests in equity shares. ELSS funds are eligible for tax deduction under Section 80C of the Income Tax Act, 1961, up to a limit of Rs. 1.5 lakh per annum.
  • How do you invest in ELSS?

    To invest in an ELSS fund online, you need to follow these steps:
    • Choose an ELSS fund. There are many different ELSS funds available in India. You can compare different funds and choose one that best suits your investment needs and risk appetite.

    • Open an investment account with a mutual fund company or distributor.

    • Complete the KYC (Know Your Customer) process.

    • Place your order to invest in the chosen ELSS fund.

    • Log in to your account and select the ELSS fund you want to invest in.

    • Enter the amount you want to invest and choose your payment mode.

    • Review and confirm your transaction.

  • What to see before investing in ELSS?

    Before investing in ELSS online, you should consider the following factors:
    • Choose an ELSS fund that matches your risk tolerance

    • Know your investment objectives

    • Look at the fund's past performance to get an idea of how it has performed in different market conditions.

    • Also, look at the fund manager's track record

    • Check the expense ratio 

  • How do I choose my ELSS funds?

    To choose the right ELSS funds for you, you should consider the following factors:
    • Your risk appetite

    • Your investment horizon

    • The fund's performance

    • The fund's expense ratio

    • The fund manager's track record

  • How long does it take to invest in ELSS?

    It takes very little time to invest in ELSS funds. You can open an account with a mutual fund company online or in person and start investing immediately. If you are investing through an online platform, you can typically complete the investment process in less than 10 minutes. 
  • Is ELSS tax-free after 3 years?

    ELSS funds are not completely tax-free after 3 years. The long-term capital gains (LTCG) on ELSS funds are taxed at 10% on the amount above Rs. 1 lakh. This means that if you redeem your ELSS funds after 3 years and make a profit of Rs. 1.5 lakh, you will have to pay LTCG tax of Rs. 5,000 (10% of Rs. 50,000).
  • Should I invest in 2 ELSS funds?

    Whether or not you should invest in 2 ELSS funds depends on your individual circumstances and risk appetite. If you are comfortable with the increased complexity and fees, then investing in 2 ELSS funds may be a good way to increase your diversification and potential returns.
  • How to invest in ELSS online?

    To invest in ELSS online, you will need to:
    • Open an account with a mutual fund company. You can do this online or in person.

    • Once you have opened an account, you will need to choose the ELSS fund(s) that you want to invest in.

    • Decide how much you want to invest and whether you want to invest as a lump sum or through a systematic investment plan (SIP).

    • Enter your payment details and complete the investment process.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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