ELSS funds or equity-linked savings scheme funds are a special kind of mutual fund that is eligible for tax exemption when invested in as per the guidelines of Section 80C of the Indian Income-tax Act, 1961.
You may be aware that section 80C of the income tax act offers the chance to lessen your tax obligation by considering certain investments and payments made throughout the financial year, with a maximum reduction in taxes reaching up to ₹1,50,000 each year.
If your total gross yearly income is Rs.1,200,000/- , investing Rs.1,50,000/- in 80C options will help to decrease your tax liability. This can lower your taxable income to 1,050,000/-.
Under section 80C, there are numerous investment options available to choose from, one of them being an ELSS mutual fund. You can opt for investing the entire amount of Rs.1,50,000/- in this scheme or divide it amongst other plans including Life Insurance, Public Provident Fund, five year FDs and Sukanya Smariddi Yojana.
It’s necessary to consider your financial strategy when deciding what to do. We can go into more detail as our module moves on.
Here’s how SEBI has defined ELSS fund-
Here are 2 things to note-
It looks as though the Government is aiming to encourage long-term investing habits with ELSS funds, thanks to their mandatory three-year lock-in period. A positive way of looking at it, I’d say!
ELSS funds are mandated to invest primarily in equity and related instruments. The market capitalization of stocks is unrestricted.
Many wrongly believe ELSS funds are a substitute for a large-cap fund, which is not wholly accurate. Generally, ELSS mutual funds could be taken as an equivalent of multi-cap funds. The data below clearly elucidates this –
These 40 ELSS funds have various investment concentrations. Here, you’ll find 23 having less than 70% in large-cap assets and the others with over 70%. Such as the IDFC Tax Advantage fund, which has a well-rounded mix of stocks from all market capitalizations.
When considering an ELSS fund, bear in mind your portfolio structure. For instance, choosing a large-cap fund such as HDFC Taxsaver would not be beneficial if you already have a substantial amount of large-cap stocks in your portfolio as 83% of HDFC Taxsaver is invested in this type of stock.
The performance of ELSS funds over the past decade can be seen as follows:
These are some of the leading funds in terms of assets under management. The average rate of return is estimated to be around 11-12%, which corresponds with the multi-cap fund’s performance.
After covering the basics of equity mutual funds, we will move on to comprehending debt funds and exploring their subcategories. Then, we can focus on learning how to select a mutual fund and construct a portfolio.
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