ELSS: What are tax-saving mutual funds? How do they help you save money?

Equity-Linked Saving Schemes (ELSS) may be one of the best options you can consider for saving income tax. These are open-ended mutual funds, which invest the majority of investors’ money in equities and related investments. Also known as tax-saving mutual funds, these financial plans offer taxpayers a number of advantages.

Here is a detailed explainer on what are Equity-Linked Saving Schemes and how they can help you save money.

What are Equity-Linked Saving Schemes?

Equity-Linked Saving Schemes are mutual funds that invest around 80 per cent of the accumulated fund in equity-related instruments. Generally ELSS instruments have a lock-in period of 3 years. ELSS mutual funds offer higher returns in comparison with other investment instruments since they are linked with the market. Conversely, this also makes them riskier than other options.

What are the advantages of ELSS mutual funds?

Professional management: Since the mutual funds are managed by professionals, investors who are not aware of all details about how the market functions can also put their money in the option.

Transparency: Since ELSS funds are managed by professionals, it offers transparency. Investors can track the performance of the mutual fund portfolio and its market value whenever they want.

Lock-in period: ELSS mutual funds have a shorter lock-in period compared to other options such as PPF. The funds have a lock-in period of 3 years only.  

Low minimum investment: A person needs a minimum investment of Rs 500 for a systematic investment plan (SIP) in ELSS.

Tax benefits: The investment qualifies for tax benefits under section 80C of the Income Tax Act.

High returns: Since they are linked to the equities market, these mutual funds offer higher returns compared to other investment schemes like PPF and NPS.

How do ELSS mutual funds help you save money?

The scheme is the only mutual fund to qualify for income tax deductions under Section 80C. A maximum of up to Rs 1.5 lakh can be claimed as deductions for ELSS investments. With this option, individuals can manage to save on taxes and also invest in an instrument that gives higher returns than traditional tax-saving instruments.

Should I invest in tax-saving mutual funds?

Investing in ELSS mutual funds can give higher returns, but also comes with higher volatility. While the lock-in period can neutralise some risks, the option is better for those who are willing to take a little risk in their investments. It will be better to offset the risks by parallel investment in fixed-income products like Employees’ Provident Fund (EPF).