Equity Linked Savings Schemes, also known as ELSS, are mutual fund investment plans that enable income tax reduction. They are also referred to be tax-saving funds for this reason.
According to section 80c of the Income Tax Act, taxpayers may invest up to INR 1.5 lakh in certain stocks and deduct that amount from their taxable income.
ELSS is one of the securities that has been legalized; other securities include PPF, postal savings such as NSC, tax-saving FDs, NPS, etc.
Features of ELSS mutual funds
- Equity makes up a huge part of the portfolio of ELSS funds.
- They all have mandatory lock-in periods, although theirs is the shortest at only three years.
- You profit from tax savings in addition to capital growth from equity investment.
- If you want a consistent income, you can choose dividend payouts, or you can choose growth for capital growth.
- Entry or exit loads are not present in ELSS Mutual Funds.
- Long-term returns from good ELSS Funds are in the 10 – 12% range, among the greatest of all financial vehicles in the tax-saving category. ELSS does, however, carry some risk.
Advantages of best ELSS mutual funds
- Only 10% of the gains are taxed on earnings.
- There is no upper investment limit.
- The three-year lock-in period is the shortest of all Section 80C options.
- Investors are not required to have extensive market understanding. The return on your investment is maximized by expert fund managers who have exceptional experience managing mutual funds.
- The potential returns are significantly larger when comparing ELSS mutual funds to other tax-saving options like PPF or NPS
Top 10 ELSS Mutual Funds
Who should invest in ELSS mutual funds?
A Hindu Undivided Family (HUF) or any individual may invest in ELSS. It is only appropriate for individuals who are knowledgeable enough, have the capacity for risk, and are committed to their investments over the long term.
Young investors who are just starting their professional careers can make long-term investments. Young investors are the best candidates for ELSS since they have the time to fully harness the power of compounding and earn significant profits while saving up to Rs 46,800 in annual taxes.
Options for investing in the best ELSS Mutual Funds
1. Growth Option
The holder won’t get any benefits in the form of dividends under the growth option. Gains are received by the investor during redemption, which increases the profits by increasing the entire NAV.
The one word of caution is that there is a market risk associated with the returns. It’s possible that markets don’t always favor investors.
2. Dividend reinvestments option
This is a choice whereby the investor reinvests dividends to raise the NAV. This is a wise move, especially if the market is performing well and is expected to do so in the future.
3. Dividend option
An investor who chooses this option receives timely advantages in the form of fully tax-free dividends. Only when there are excessive profits over and above are dividends issued.
How to evaluate the best ELSS mutual funds
1. Fund returns
To check that the fund has remained stable over the years, compare its performance to that of its peer competitors. An investor can invest in the suggested funds based on these criteria.
2. Expense ratio
The expense ratio shows how much of your investment is used to manage the fund. Higher take-home returns were the result of a decreased expense ratio. It goes without saying that you should select the fund with the lower expense ratio.
3. Fund History
Select investment companies with a track record of steady performance over a lengthy period, such as five to ten years.
Based on its benchmark and the caliber of the equities in its portfolio, a fund’s performance is represented. A fund will provide significant returns if it outperforms its benchmark or if the stocks perform better.
4. Financial Parameters
To analyze a fund’s performance, consider a number of criteria, including Standard Deviation, Sharpe ratio, Sortino ratio, Alpha, and Beta.
A fund that has a higher beta and standard deviation is riskier than one that has a lower beta and deviation. Because they give better returns for each additional risk you take, choose funds with a higher Sharpe ratio.
Building trust in the fund is mostly dependent on the fund manager. The fund manager is crucial because choosing the right stocks and building a solid portfolio are what enable the fund to generate high returns. Their competency skills and experience help to build confidence in this regard.
Why do you invest in ELSS Funds?
Best ELSS Funds to Invest in 2023
Fund Name and their 3-Year Compound Annual Growth Rate (3Y CAGR)
| Fund Name | 3-Y CAGR |
| Quant Tax Plan | 33.6% |
| Bank of India Tax Advantage Fund Eco | 24.4% |
| Bank of India Tax Advantage Fund | 23.8% |
| Union Long-Term Equity Fund | 20.6% |
| Canara Robeco Equity Tax Saver fund | 20.2% |
| UTI Long-Term Equity Fund | 19.3% |
| Mirae Asset Tax Saver Fund | 19.2% |
| DSP Tax Saver Fund | 18.5% |
| UTI Long Term Equity Fund | 17.8% |
| Kotak Tax Saver Scheme | 17.1% |
| Principal Personal Tax Saver Fund | 16.8% |
| Baroda ELSS 96 Plan A | 16.3% |
| SBI Magnum Long Term Equity Scheme | 16.3% |
| ICICI Prudential Long Term Equity Fund Tax Saving | 15.5% |
| Invesco India Tax Plan | 15.1% |
| Tata India Tax Savings Fund | 15% |
| Baroda BNP Paribas ELSS Fund | 13.8% |
| SBI Magnum Long-Term Equity Scheme | 12.9% |
| Nippon India Tax Saver ELSS Fund | 12.7% |
FAQs
Are ELSS funds better than mutual funds?
ELSS funds are a type of mutual fund that invests primarily in equity, providing the potential for higher returns and tax benefits.
What are the advantages of ELSS over the tax-saver FD?
The advantages of ELSS (Equity Linked Savings Scheme) over tax saver Fixed Deposits (FDs) include the potential for higher returns due to equity investments, tax benefits under Section 80C with a limit of 1.5 lakh INR, and the opportunity for wealth creation through long-term equity market exposure.
What are the advantages of ELSS funds?
The advantages of ELSS (Equity Linked Savings Scheme) funds include the potential for higher returns due to equity investments, tax benefits under Section 80C of the Income Tax Act, and a lock-in period of three years, which encourages long-term investment.
