ELSS or Equity Linked Savings Scheme is a type of mutual fund in which you can invest to earn returns in line with the stock market’s performance. These funds mainly invest in equity or equity-related instruments of different companies listed on stock exchanges. The fund manager selects the instrument and type of company, i.e. large, mid or small cap, based on the fund’s objectives.
It invests in an array of companies from different sectors, thereby ensuring enough diversification and acting as a hedge against risky tendencies of equity instruments.
These funds generally come with a lock-in period of 3 years. It means you cannot withdraw your money from these funds before the end of 3 years from the date of your investment. Read on to know more about the best ELSS funds of 2022 in which you can invest in.
Top 10 ELSS Funds in 2022
Here are some of the best ELSS funds to invest in 2022:
|Fund Name||3-Year Annualised Returns*|
|Quant Tax Plan – Direct Plan – Growth||43.87%|
|SBI Tax Advantage Fund – Direct Plan – Growth||38.06%|
|SBI Long Term Advantage Fund – Series – 4 – Direct Plan – Growth||34.75%|
|Sundaram Long term Micro Cap Tax Benefit Fund – Series – 5 – Direct Plan – Growth||33.13%|
|Sundaram Long Tenure Micro Cap Tax Benefit Fund – Series – 6 – Direct Plan – Growth||33.08%|
|Sundaram Long Term Tax Advantage Fund – Series – 3 – Direct Plan – Growth||32.62%|
|Sundaram Long Tenure Micro Cap Tax Benefit Fund – Series – 4 – Direct Plan – Growth||32.53%|
|Sundaram Long Term Tax Advantage Fund- Series – 4 – Direct Plan – Growth||32.19%|
|Sundaram Long Tenure Micro cap Tax Benefit Fund – Series – 3 – Direct Plan – Growth||31.56%|
|SBI Long Tenure Advantage Fund – Series – 3- Direct Plan – Growth||30.50%|
These are some of the best performing tax-saving mutual funds in which you can invest to enjoy dual benefits of tax savings and high return potential.
How Do ELSS Funds Work?
It is a type of tax-advantaged equity-oriented mutual fund. Unlike regular mutual funds, which do not come with any tax benefit, these funds provide tax benefits to their investors. Individuals can claim up to Rs. 1.5 lakh as deductions on the investment made in these mutual funds.
You can invest in these mutual fund schemes via lump sum or SIP. In case you are investing through SIP, the lock-in period of three years is calculated separately for each investment and not from the date of SIP registration. In other words, every SIP installment must complete a three years lock-in period.
Also Read: Tax Saving Options For You Under Section 80C
Who Should Invest in ELSS Funds?
- High-Risk Appetite: A significant portion of an ELSS fund’s assets is invested in equity instruments. Due to the inherently risky nature of equity investments, individuals having a high risk tolerance level can consider investing in these. However, it may not be a feasible investment option for risk averse investors.
- Medium to Long-term Investment Horizon: These funds come with medium to long term investment horizons. This is because as time passes, volatility will reduce, and you can receive good returns on your investment. Therefore, if you have surplus money which you can park for the mandatory lock-in period of 3 years, you can consider going ahead with this investment.
- Looking for Tax-saving options: As this fund provides tax benefits in the form of deductions, individuals who make investments as a part of their tax planning process can also opt for this mutual fund. In addition, investors who have a big tax liability can use these funds to reduce their gross tax liability.
What Are the Advantages of ELSS Funds?
Here are some advantages of investing in ELSS funds:
- Short lock in period
Unlike other tax saving instruments, ELSS or equity-linked saving schemes come with a relatively shorter lock-in period. This way, investors can redeem or withdraw their investment amount within a shorter time period. Other tax savings instruments like Public Provident Funds, National Savings Certificate and National Pension Scheme come with a longer lock-in period.
- Tax savings
One of the biggest advantages of this mutual fund is that it comes with an associated tax benefit. You can claim deductions of up to Rs. 1.5 lakh on investments made under this mutual fund plan. You can claim these deductions under Section 80C of the Income Tax Act and reduce your net tax liability.
- High return potential
As these are equity-oriented funds, they come with high return potential. You can earn decent returns if you stay invested for a long period of time and accumulate wealth steadily. The average rate of return is quite higher than other investment instruments like PPF or NPS.
Also Read: Invest in Tax Saving Mutual Funds in India
Things to Consider before Investing in an ELSS Funds
You should consider the following things before taking an investment decision regarding the ELSS funds:
- Investment objective
You must carefully analyse whether your investment objectives are in line with the investment horizon or objective of a particular ELSS fund. For example, if you are planning to invest in an ELSS fund and build a corpus to finance your child’s higher education, in that case, the respective fund must also come with a medium term investment timeline to fulfil the financial goals.
You can go ahead with investing in a specific ELSS fund if you think that it will be capable of fulfilling your financial goals.
- Associated Risk
Another factor that you must consider while making an investment decision regarding ELSS funds is the risk of investment. As these funds invest in equity-related instruments, it comes with a high risk band. An ELSS fund investing in mid-cap or small-cap stocks will be relatively riskier than another fund investing primarily in large-cap stocks.
- Expense ratio of the fund
Expense ratio of a fund is an important factor to consider while making an investment decision. It generally includes expenses like fund manager’s fees, register fees, distributor’s commission, advertising and auditing charges, etc. The expense ratio of an ELSS fund is usually up to 2.25%, hence you should select the funds that have a low expense ratio.
Taxation of ELSS Funds
An equity-linked savings scheme is a type of equity mutual fund. Therefore, they will be taxable just like any other equity mutual fund.
Based on the holding period of equity funds, proceeds from sale of units of these funds are taxable under short term capital gains tax or long term capital gains tax. As ELSS have a lock-in period of 3 years, they will come under long term capital gains tax or LTCG. All gains earned from selling units of ELSS are subject to LTCG. The rate of LTCG is 10% without indexation benefits. However, gains of up to Rs. 1 lakh are exempt from any taxation under LTCG.
Moreover, dividends received from these funds are also taxable under respective tax slabs. The dividend income will be added to your gross total income and shall be taxable at applicable tax rates. For example, if you are in the 30% tax bracket, you shall be liable to pay 30% tax on the dividend received.
Apart from these tax implications, you are also eligible to receive tax benefits for investing in an ELSS fund. According to section 80C of the Income Tax Act, investments made in ELSS funds up to Rs. 1.5 lakh can be claimed as deductions while filing the Income Tax Returns.
ELSS or equity-linked savings scheme is a popular mutual fund investment because of the tax benefits associated with it. Investments in the best ELSS funds can provide you with substantial returns after the mandatory lock-in period and help you fulfil your medium to long term financial goals. However, prospective investors must conduct a thorough market analysis before taking an investment decision.
FAQs about ELSS Funds
What are the types of ELSS funds?
There are two types of ELSS funds – growth ELSS funds and dividend ELSS funds. Under the former option, profits generated from them are not distributed among investors, but rather they are reinvested back into the scheme. Whereas, in case of the latter, fund houses distribute profits as dividends to their investors at fixed intervals. The dividend is distributed only when the fund generates a profit.
How can I invest in an ELSS scheme online?
You can follow these steps to invest in an ELSS fund:
Step 1: Visit the online portal of the respective AMC/broker.
Step 2: Register on their platform and complete the e-KYC procedure.
Step 3: Choose the particular ELSS plan in which you wish to put your money.
Step 4: Select SIP or lump sum method.
Step 5: The last step entails transferring funds from your bank account to purchase corresponding units of your preferred mutual fund.
Is ELSS better than NPS?
It depends on the investor and their goals and vision. ELSS helps in fulfilling medium to long term goals and offers higher returns than NPS. The lock-in period of an ELSS is also lower than NPS. However, NPS comes at a lower risk than ELSS. Hence, you can choose to invest in an ELSS fund or an NPS as per your investment objectives.