What are ELSS mutual funds

ELSS Mutual Funds – Save Tax While Creating Wealth:

An Equity Linked Savings Scheme (ELSS) fund is an open-ended Equity Mutual Fund that helps you in tax saving (best tax saving mutual fund) and provides an opportunity for you to grow your money.

• ELSS Fund Tax Benefits: They are qualified for tax exemptions under section (u/s) 80C of the Indian Income Tax Act and people can claim the same by starting an ELSS fund and filing ITR.
• Investing in these kinds of mutual funds provides a tax benefit to investors u/s 80C, which is capped to an amount of Rs 1.5 Lakhs which is the maximum amount.
• These mutual funds invest 65% of the money in equity-related instruments that are notified to avail tax benefits.

How to invest in ELSS mutual funds?

• To invest in these funds you can either visit the mutual fund company website and register online and investor you can contact their fund manager to invest in their mutual fund schemes. 
• There are third-party apps you can try for investing in these types of funds like coins by Zerodha, Mycams, ET money, and other apps. ELSS mutual funds are a type of diversified equity mutual fund that is qualified for tax exemption under section 80C of the Income Tax Act,

These funds help with capital appreciation and tax benefits.

ELSS funds are available with a lock-in period of 3 years which is 5 years for Bank Funds and a Post Office time deposit of 5 years.

Why in ELSS mutual funds are better than other funds: (ELSS Fund Benefits)

• The main reason is tax saving, ELSS mutual funds help in tax saving, ELSS mutual funds are qualified for tax exemptions under section (u/s) 80C of the Indian Income Tax Act and people can claim the same by starting an ELSS fund and file ITR.
• Investing in these mutual funds provides a tax benefit to investors u/s 80C, which is capped to an amount of Rs 1.5 Lakh the maximum amount.
• If you compare ELSS mutual funds invest around 65% of the money in equity-related instruments that are notified to avail tax benefits also the returns from ELSS funds can be higher than the bank returns based on the market situation during that time period.
• Lock-in Period: ELSS funds have loack-in period of just 3 years wherein banks provide Tax saving funds have lock-in periods for more than 3 years like 5 years or more years.
• ELSS funds have a short lock-in period of 3 years compared to the maturity period of NSC which is 6 years and 15 years for PPF.
• ELSS funds earning potential is high as these funds are equity-linked schemes.
• When investing in ELSS funds the investor can also opt for the dividend option to get some gains during the lock-in period.

In ELSS funds the investors can opt for ELSS SIP meaning: Systematic Investment Plan [SIP], or if the investor wants to invest a large amount once then they can opt for Lumpsum investment or One-time investment.

Top ELSS mutual funds To Invest in 2025:

Source: Zee Business, Livemint

Now let’s see a few disadvantages of ELSS mutual funds:

• Market Exposure and Risk: ELSS funds predominantly channel their investments into equities, thereby subjecting investors to the inherent volatility and uncertainties entailed within the realm of stock market participation. The susceptibility to market vicissitudes underscores the potential for substantial fluctuations in fund valuation, possibly culminating in capital erosion.
  
• Non-Guaranteed Returns: Unlike conventional tax-saving avenues such as the Public Provident Fund (PPF) or the National Savings Certificate (NSC), ELSS funds do not furnish assured returns. The quantum of returns from ELSS investments is contingent upon market dynamics and lacks the predictability of fixed returns.
  
• Lock-In Period: Although the lock-in duration for ELSS funds is relatively abbreviated in comparison to certain other tax-saving alternatives (comprising three years), it nevertheless imparts a constraint on investor liquidity. Premature withdrawal of funds prior to the expiration of the stipulated lock-in term could be precluded, thereby potentially impinging upon the capacity to address exigent financial exigencies.
  
• Tax Implications on Returns: While ELSS investments furnish tax exemptions on the principal investment quantum under Section 80C, the returns realized from these investments are susceptible to capital gains taxation upon redemption, contingent upon the holding tenure. Short-term capital gains (realized within a span of less than one year) are subject to a relatively elevated tax rate vis-à-vis long-term capital gains.
  
• Limitation in Asset Class Diversification: The pronounced equity orientation of ELSS funds imparts a limitation with respect to diversification across alternative asset classes such as debt instruments, gold, or real estate. The absence of diversification might impede comprehensive risk mitigation within an investment portfolio.
  
• Capital Erosion Risk: ELSS funds do not confer capital protection guarantees and are exposed to the risk of capital erosion in scenarios wherein the fund’s net asset value (NAV) experiences substantial depreciation. This underscores the plausible inability to recoup the principal investment amount.