Best ELSS mutual funds – Invest in tax saving mutual funds investments

What are ELSS Funds?

ELSS funds are getting increasing popularity today due to their tax saving nature. ELSS are also called tax saving mutual funds, because they serve as an excellent tax saving tool with a lot of potential for growth apart from just helping you to save tax. 

You can save taxes u/s 80C of the Income Tax Act with the help of these best ELSS plans. Also, there are other options that you can choose to avail deductions u/s 80C, such as ULIPs (Unit Linked Insurance Plans), NPS (National Pension Scheme), Tax saver fixed deposits, etc. However, due to higher tax efficiency of ELSS plan, they are considered to be one of the best options for tax saving investment.

One can invest a lump-sum amount in top elss funds, or can even do  it through a Systematic Investment Plan (SIP).

ELSS Mutual Funds invest predominantly in equity and related instruments which makes it a diversified tax saving mutual funds.

With a lock-in period of three years they also provide investors with capital appreciation and dual perks of the tax exemption under Section 80C of the Income Tax Act.


Invest in best elss funds


Benefits of investing in Equity Linked Savings Scheme

These funds enable investments that are eligible for tax benefit up to 1.5 lakh, under Section 80C. Also, this scheme has the shortest lock-in period of three years in comparison to other tax saving investments which is an added advantage.

Investors have to pay a 10% long-term capital gains tax on gains excess of Rs. 1 lakh in a financial year starting from April 1st, 2018.

Starting with Rs. 500 per month one can also opt for Systematic Investment Plan – SIP, and make disciplined investments in these funds.

There are other options like growth options, dividend options and dividend reinvestments options for ELSS tax saver investment.


Budget 2018 – the effect on Best ELSS Funds

The recent budget announcement by the Finance Minister has posed a major mayhem on individuals who opt the ELSS strategy of investment. Post January 31st, 2018, he has announced a 10% Long Term Capital Gain (LTCG) tax on the equity and other related tax saver funds. New investors need not be perplexed because this LTCG tax is only for the gains above 1 lakh in a financial year.

These funds can be evaluated by four major factors – Returns, Fund-History, Expense Ratio and Financial Parameters.


Tax saving mutual funds – the most tax efficient option

ELSS plans are more efficient among the most tax saver options. With around 8% returns that tax saving bank FDs yield, Equity Linked Saving Scheme investments have delivered an average return in excess of 15% CAGR in the past 5 years. These funds are also highly tax efficient, apart from just being a good investment option.

With most of the investors the biggest problem is that they opt for investment options only for the purpose of saving their taxes. However, the the primary goal is to be realized that an investment is to provide good returns that beat inflation. Tax saving options are considered to be secondary when talking about a good, viable investment. Make sure your money should be making money first, and then save money through deductions.

Things to keep in mind:

The primary aim of investing should be creation of wealth rather than tax saving. These funds has an amazing aspect of tax saving, but that should be a secondary concern. They provide very good returns to the investor.

Few things you should factor in, while making investment decisions:


Analyse your risk appetite

For the average investor there are quite a few ELSS plans which turn out to be most suitable for them . Just like any other investment, you should be investing only in those funds that fit into your risk appetite. It is generally advisable that you should invest in a fund that is invested in large cap companies if you have a low to moderate risk appetite and if you have a slightly higher risk appetite, then you could also consider looking at funds that invest in a combination of small and mid-cap companies.


Don’t Go Blind – Conduct your own research:

If you are looking to invest in ELSS mutual fund, the first thing you should be checking is the past performance of the  fund. Ideally you should be analysing their 3-year and 5-year performance, and then compare that performance with the market benchmark.

Why ELSS plans are the best tax saver options?

Lock-in period is the shortest

ELSS have the shortest lock-in period as compared to other tax saving options such as NPS (National Pension Scheme), ULIP (United Linked Insurance Plan), etc. NPS has a lock-in period until the age of 60 years, while ULIPs have a lock in period of at least 5 years. Bank fixed deposits also have a lock-in of 5 years, while PPF (Public Provident Fund) also has a lock-in of 15 years. Equity Linked Saving Scheme funds on the other hand, have a lock-in period of only three years.


Highest returns

Being tax efficient at the same time these funds also provide the investor with the highest returns, apart from having the shortest lock-in period. In the past 5 years these funds have delivered an average return in excess of 15% CAGR, while other options rarely provide returns above 9% under Section 80C. However, equity-oriented ULPIs do get close to the 12% returns. Not just the management costs are pretty low but also these funds  provides the best returns. Though with close to the 12% return on investment, equity-oriented ULIPs do not provide better returns.


EEE category

Equity Linked funds come under the EEE category (exempt-exempt-exempt). Not the just the investment amount, but also the dividends earned and maturity amount are completely tax free. Under section 80C the other products which come with EEE benefits are EPF and PPF, with PPF having very long lock-in period of 15 year


Investing discipline

You can invest into these funds through SIP (Systematic Investment Plan). Most of the investors invest with the intent of saving taxes and they do not realize that these options supposed to be secondary. Investments should be made in such a way that it provides you with good returns first, and then helps you in tax saving. Among individuals investing discipline has to be instilled, and this is possible only through SIP.

The Bottom Line:

Equity Linked funds are better than the other two options in the long term which are equity-based investment and are subjected to market fluctuations. They can help you earn an inflation beating returns of 14% to 16% if invested for a longer period. Hence, these funds are an lucrative investment option.

Tax saving plans provide very good returns while saving a considerable amount of tax and thus investing in them is considered to be beneficial. With a very short lock-in period of just 3 years, these funds come under the EEE category.


Who should invest?

Investors who are willing to take risks as these investments are equity oriented. Since there is a risk of volatility, it is advised that you invest for a longer duration as compared to the lock-in period of 3 years.

People who have just started their career and can invest for a long period of time can opt for the more riskier these funds which would give higher returns compared to others.


ELSS in comparison to other tax saving instruments like NSC and PPF


The below table is a comparative representation of the three investment strategies – ELSS, NSC and PPF:

Minimum lock-in period3 years5 years15 years
Taxation of interest or dividendPresently, dividend is not taxed but starting April 1st, 2018, dividend from ELSS will be subject to dividend distribution tax at 10%Interest earned on NSC is taxable under “Income from other sources” but since the interest is gain reinvested in NSC, it becomes eligible for deduction u/s 80CTax free
Taxation at the time of redemptionPresently, LTCG on redemption of Equity Linked Savings Scheme Funds is not taxable in the hands of investors but starting 1st Apr’18, it will be taxed at 10% on the gains in excess of Rs. 1 lakhs in a financial year.Tax freeTax free
ReturnsThey have delivered average returns in excess of 15% over the past few years7.6% compounded annually7.8%
Minimum investmentRs. 500Rs. 100Rs. 500
Maximum investmentNo limitNo limitRs. 1,50,000



How to do Tax Saving Through Mutual Funds?

ELSS tax saver funds give much better returns on investment as compared to other options and thus are very unique in their nature. One can use these investments to avail allowable deductions of up to Rs. 1.5 lakh, under Section 80C of the Income Tax Act.

These funds also have a shorter lock in period of three years. As compared to the average elss plans the returns are 100 percent as the investment goes into equity. One can invest in elss mutual fund with either a with a start an SIP (Systematic Investment Plan) or a lump sum amount. However, if you are a beginner to the field of investing, it is advisable that you start an SIP, to average out the market peaks.

You can start by investing as little as Rs. 500 per month. There is no fixed upper limit. However, keep in mind that you get a tax deduction only till Rs. 1.5 lakh.


Better Tax Saving Investment:

You must know that you have three good options if your sole intention behind investing in these funds is to save tax. The first one is NPS, which is National Pension System. The other options that you have are ELSS Mutual Fund and ULIP (Unit Linked Insurance Plan).

ULIPs comes with a minimum lock in period of five years. ELSS Mutual Fund have a lock-in period of just three years. Plagued with poor management, high costs, and a sickening lack of transparency ULIPs are not-so-good investment options, especially for early investors. Not just ULIPs, NPS funds also have a very long lock-in period, which effectively extends to retirement. Apart from such a long lock-in period, this investment only gives you partial exposure. In effect, NPS is more of a retirement plan, than it is a savings plan and also the annuity proceeds received from the investments are taxable.

Invest in tax saving investments

ELSS Tax Saving Plans – The Perfect Choice for Beginners

These funds provide 100% equity exposure and are great for beginner investors. The investor is often motivated to invest more into equity oriented schemes when the investor gets returns as such from equity related schemes,. Investors are generally attracted to the best ELSS plans because of the tax saving aspects. However, they generally prefer investing for the larger part in equity oriented schemes once they get a taste of long term equity returns,.

In order to save tax all salaried individuals must have at least one elss mutual fund investment, and get a dip into the equity market through the these funds. A lot of people keep portraying that equity mutual fund scheme are extremely risky, and even go on to say that retirees must not invest into it as it is too risky. However, this is simply not true. Tax saving options give decent returns on your investment and are pretty safe.


Investment First – Tax Saver Later

One of the biggest problems with the average Indian investor is that they don’t invest when the time is right. Most Indians invest only when they are supposed to be paying taxes. They don’t care about investing at the right time. This means that they invest in a hazardous manner, and don’t bother looking at the investment costs, and how much tax they will end up saving. Investors  take a deal from the investment advisors without verifying their credibility or the competence. In this process, some people even lose money. Planning your investments for the entire year is the best way to avoid these situations. To make a good investment plan and to optimize your time and money consult a good financial advisor. Get in touch with our expert financial advisors at WealthApp to help you arrive at the appropriate tax savings strategy.

Benefits of investing in tax saving mutual funds


“Start early-invest less and earn more” is the mantra to be followed above all.

On the whole, these funds are still the best vehicle to hop on to fulfill your long-term financial vision.