What are ELSS Mutual Funds

An ELSS (equity-linked savings scheme) mutual fund is a type of fund that invests mainly in stocks or other equity-related assets. It allows investors to benefit from the potential capital appreciation without directly participating in the equity market. Both lump sums and SIPs are allowed, catering to investors with varied needs. Moreover, ELSS investments can qualify for tax deductions of up to 1.5 lakhs. This article explains what is ELSS mutual fund, the benefits of investing in ELSS, key things to consider while investing and more. 

How Do ELSS Mutual Funds Work? 

Having understood ELSS mutual fund full form and its definition, let’s know how these funds work: 

ELSS Invests Primarily in Equity  

ELSS funds are diversified equity funds that mainly invest their funds in the stocks of listed companies. The stocks are selected based on different market capitalisations, including large-cap, mid-cap, and small-cap stocks, and also based on different sectors. 

Long-Term Capital Growth Objective 

The aim of ELSS funds is to generate capital appreciation in the long run. Being equity-oriented funds, they can be appropriate for those investors who have a longer investment approach. 

The Fund is Professionally Managed   

ELSS funds are managed by skilled fund managers who select the stocks after conducting market research. The aim is to create an optimised portfolio that balances risks and returns.  

Mandatory Lock-in Period 

ELSS investment comes with a lock-in period of three years, during which the invested amount cannot be redeemed. 

Tax Benefits Available Under Section 80C 

Tax benefits Investments under the ELSS funds are eligible for taxation deductions under section 80C of the Income Tax Act of 1961. Though the maximum amount that can be invested is not applicable, the amount eligible for tax deductions is not more than ₹1.5 lakh annually. 

Key Features of ELSS Mutual Funds 

After understanding the ELSS mutual fund meaning, let's learn its features, which include: 

1. Lock-in period 
   There is a minimum lock-in period of three years. In terms of investment period, there is no limit.  
2. Equity exposure  
   It invests at least 80% of its funds in equities.  
3. Tax saving 
   Under section 80C, investments in ELSS are eligible for a tax deduction of up to Rs 1.5 lakh.  
4. Market-linked returns  
   As a market-linked investment, ELSS performance is determined by the performance of the underlying equities in the portfolio.  
5. Diversified Portfolio 
   Funds that invest in ELSS typically invest in a broad range of securities from a variety of sectors, thereby minimising concentration risks. 

What are the Benefits and Risks of Investing in ELSS Funds? 

The following are the benefits and risks of investing in ELSS funds. 

Who Should Invest in ELSS Mutual Funds? 

The following individuals can invest in ELSS mutual funds: 

• Salaried Individuals: Salaried individuals contribute towards the Employees’ Provident Fund (EPF), which is a fixed-income product. If an individual wants high returns, then ELSS funds may be a suitable investment option. While unit-linked insurance plans (ULIPs) and the National Pension System (NPS) also do the same; they have a higher lock-in period and lesser potential for returns. For instance, ULIPs have a lock-in period of five years.  
•  First-time investors: ELSS may be a suitable option for new investors as they provide tax benefits. They have a comparatively lower risk than direct stock investments. The preferred way to invest in these funds is through  
• Taxpayers: Young taxpayers can invest in these funds. They can help save tax under section 80C of the Income Tax Act. Other taxpayers can also take advantage of this. 
•  Long-Term Investors: As the lock-in period of ELSS funds is three years, it is suitable for long-term investors. The lock-in period applies to SIP payments as well. So, if an individual wants to withdraw the full amount invested over 12 months, they will have to wait until the last SIP instalment has been completed. 

Things to Consider Before Investing in ELSS Funds 

Along with learning what is an ELSS  mutual funds, it is essential to keep some factors in mind while investing in them. The following are the things that need to be considered before investing in ELSS funds. 

• Fund Performance: Before investing in a fund, investors should research and compare its performance with other competitors.  
• Expense Ratio: The expense ratio indicates the percentage of assets allocated to managing the funds. Select the funds which have lower expense ratios for higher net returns. 
• Financial Reports: Investors can check the financial reports of the ELSS funds to examine their historical performance and asset allocation. This will help them in making more informed decisions.  
• SIP or Lumpsum: The two main types of methods through which investors can invest are either SIP or lumpsum. Under the SIP method, they can invest a regular amount monthly. However, under the lumpsum method, they invest a huge sum of funds at once. 
• Fund manager: The fund manager plays an important role in managing the funds. Thus, they should be efficient and have enough experience to pick the right stocks and create a suitable portfolio. 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion 

ELSS mutual funds provide a balanced investment opportunity by combining tax-saving benefits with potential long-term capital growth. Understanding what are ELSS funds is important for investors who want to optimise their investment strategy while saving on taxes. Despite the risks associated with equity investments, ELSS can be a reasonable choice for those with a longer investment horizon and a higher risk tolerance. To start the journey with ELSS and explore different fund options, consider using an online trading app that provides easy access and insights into various mutual funds.