Best ELSS Funds to Invest In 2024

• Quant Tax Plan Direct – Growth
• SBI Tax Advantage Fund Series III Direct – Growth
• Canara Rebeco Equity Tax Saver Plan Direct – Growth
• Parag Parikh Tax Saver Fund Direct – Growth
• Mirae Asset Tax Saver Fund Direct Plan – Growth

Forbes Advisor India determined the best tax-saving mutual fund schemes based on how leading funds fared on the following metrics:

• Expense ratio of the scheme compared to its peers given the important role expense ratio plays in determining the overall returns an investor makes on their investment.
• Performance compared to benchmark indexes over a period of time—three-year and five-year performance were considered as key.
• Three-year and five-year performance of the mutual fund compared to competing schemes offered by other funds.

ELSS fund or equity-linked savings scheme or tax saving mutual funds is a mutual fund that falls in the category of tax redemption on investment and partial taxation on returns. It is a stock-oriented fund with a lock-in period of three years and its returns are subject to market conditions. ELSS funds invest in the stocks of various companies depending on the kind of investment choices the fund manager makes.

ELSS is the only mutual fund type that is covered in the tax-saving mutual funds category and one can get a rebate of INR 1.5 lakh in by investing in them. This means that this investment of 1.5 lakh will be deducted from your yearly income and will not be taxed. Another instrument for this kind of investment is public provident fund or PPF and one can only invest in both ELSS and PPF at the same time but the rebate will have a cap of INR 1.5 lakh.

Equity Linked Saving Schemes (ELSS) are a type of mutual fund that primarily invest in equity and equity-related instruments. They are unique because they offer tax benefits under Section 80C of the Income Tax Act in India, making them a popular choice for tax-saving investments. Here’s how ELSS mutual funds work:

Investment in Equities: ELSS funds primarily invest in equities and equity-related instruments, such as stocks and equity derivatives. These funds aim to provide capital appreciation over the long term by participating in the growth potential of the stock market.

Lock-in Period: ELSS funds come with a mandatory lock-in period, which is currently set at three years. During this lock-in period, investors cannot redeem or sell their units in the fund. This lock-in period helps promote long-term investment horizons and is a prerequisite for availing tax benefits.

Tax Benefits: ELSS investments offer tax benefits under Section 80C of the Income Tax Act. Investors can claim a deduction of up to Rs. 1.5 lakh from their taxable income by investing in ELSS funds. This reduces their overall tax liability. Additionally, any capital gains earned on the investment after the lock-in period of three years are tax-free.

SIP and Lump Sum: Investors can choose to invest in ELSS funds through Systematic Investment Plans (SIPs), where they invest a fixed amount regularly, or through lump-sum investments. SIPs provide the benefit of rupee cost averaging and disciplined investing.

Diversification: ELSS funds are managed by professional fund managers who diversify the portfolio across various stocks and sectors. This diversification helps reduce the risk associated with investing in individual stocks.

Risk and Returns: ELSS funds are equity-oriented, which means they come with a certain level of risk. The returns from ELSS funds can vary based on the performance of the stock market. Over the long term, they have the potential to deliver attractive returns, but short-term fluctuations are common.

Equity Linked Saving Schemes (ELSS) are a type of mutual fund that primarily invest in equity and equity-related instruments. They are unique because they offer tax benefits under Section 80C of the Income Tax Act in India, making them a popular choice for tax-saving investments. Here’s how ELSS mutual funds work:

Investment in Equities: ELSS funds primarily invest in equities and equity-related instruments, such as stocks and equity derivatives. These funds aim to provide capital appreciation over the long term by participating in the growth potential of the stock market.

Lock-in Period: ELSS funds come with a mandatory lock-in period, which is currently set at three years. During this lock-in period, investors cannot redeem or sell their units in the fund. This lock-in period helps promote long-term investment horizons and is a prerequisite for availing tax benefits.

Tax Benefits: ELSS investments offer tax benefits under Section 80C of the Income Tax Act. Investors can claim a deduction of up to Rs. 1.5 lakh from their taxable income by investing in ELSS funds. This reduces their overall tax liability. Additionally, any capital gains earned on the investment after the lock-in period of three years are tax-free.

SIP and Lump Sum: Investors can choose to invest in ELSS funds through Systematic Investment Plans (SIPs), where they invest a fixed amount regularly, or through lump-sum investments. SIPs provide the benefit of rupee cost averaging and disciplined investing.

Diversification: ELSS funds are managed by professional fund managers who diversify the portfolio across various stocks and sectors. This diversification helps reduce the risk associated with investing in individual stocks.

Risk and Returns: ELSS funds are equity-oriented, which means they come with a certain level of risk. The returns from ELSS funds can vary based on the performance of the stock market. Over the long term, they have the potential to deliver attractive returns, but short-term fluctuations are common.

Liquidity: While there is a three-year lock-in period, ELSS funds are more liquid compared to other tax-saving options like the Public Provident Fund (PPF) and National Savings Certificate (NSC). Once the lock-in period is completed, investors can redeem their units at any time.

Transparency: ELSS funds provide regular updates and disclosures about their portfolio holdings, performance, and other relevant information. Investors can track the fund’s performance and portfolio to make informed decisions.

Before investing in Equity Linked Saving Schemes (ELSS) funds, it’s essential to consider various factors to make an informed decision that aligns with your financial goals and risk tolerance. Here are some key factors to consider:

Investment Goals: Determine your investment objectives, such as tax-saving, wealth creation, or a combination of both. ELSS funds offer a tax benefit, but they are also equity-oriented, so your goals should guide your investment strategy.

Risk Tolerance: Assess your risk tolerance, as ELSS funds invest in equities and are subject to market volatility. If you have a lower risk tolerance, you may want to consider other tax-saving options with lower exposure to the stock market.

Lock-in Period: ELSS funds have a mandatory lock-in period of three years. Ensure that you are comfortable with this lock-in duration, as you won’t be able to redeem your investment before this period.

Fund Selection: Research and select ELSS funds that align with your investment goals and risk tolerance. Consider factors such as the fund’s historical performance, the fund manager’s track record, and the fund’s portfolio composition.

Diversification: Look for ELSS funds with a diversified portfolio. Diversification can help spread risk across different sectors and market capitalizations, reducing the impact of a poor-performing stock.

Fund House Reputation: Consider the reputation and credibility of the asset management company (AMC) managing the ELSS fund. A well-established AMC with a good track record may provide more confidence in the fund’s management.

Expense Ratio: The expense ratio represents the annual cost of managing the fund as a percentage of the total assets. Lower expense ratios are generally more favorable as they can have a positive impact on your overall returns.

SIP or Lump Sum: Decide whether you want to invest in ELSS through a Systematic Investment Plan (SIP) or a lump-sum investment. SIPs allow you to invest regularly, while a lump sum is a one-time investment. Choose the method that suits your investment style.

Tax Implications: Understand the tax benefits and implications of ELSS investments. While ELSS funds offer a tax deduction under Section 80C, the returns generated are subject to capital gains tax.

Exit Strategy: Plan your exit strategy after the mandatory lock-in period of three years. Decide whether you want to redeem your investment or continue holding it based on your financial goals and market conditions.

Long-Term Perspective: ELSS investments are most effective when held for the long term. Consider your ability to stay invested beyond the lock-in period to benefit from potential capital appreciation.

Regular Monitoring: Keep track of your ELSS investments and monitor their performance. If a fund consistently underperforms or no longer aligns with your goals, be prepared to switch to a different fund.

Selecting the best Equity Linked Saving Schemes (ELSS) funds requires careful consideration of several factors to align your investment with your financial goals and risk tolerance. Here’s a step-by-step guide on how to choose the best ELSS funds:

Define Your Investment Goals: Clearly define your investment objectives. Are you primarily looking for tax savings, wealth creation, or a combination of both?

Assess Your Risk Tolerance: Evaluate your risk tolerance. ELSS funds invest in equities and are subject to market volatility. Make sure the risk matches your comfort level.

Check the Fund’s Performance: Research the historical performance of ELSS funds. Look at their past returns, but remember that past performance is not indicative of future results. Focus on consistency and risk-adjusted returns.

Evaluate the Fund Manager: Investigate the fund manager’s track record and experience. A skilled and experienced manager can significantly impact the fund’s performance.

Diversification: Check the fund’s portfolio composition. Diversified ELSS funds spread investments across different sectors and market capitalizations, reducing risk. Ensure the fund aligns with your diversification preferences.

Expense Ratio: Compare the expense ratios of ELSS funds. Lower expense ratios can enhance your overall returns. Choose funds with competitive expense ratios.

Fund House Reputation: Consider the reputation and credibility of the asset management company (AMC) managing the ELSS fund. A well-established AMC with a good track record can inspire confidence.

Lock-in Period: Confirm that you are comfortable with the mandatory lock-in period of three years. ELSS funds have this lock-in duration, and you won’t be able to redeem your investment before it ends.

Long-Term Perspective: ELSS investments are more effective when held for the long term. Consider your ability to stay invested beyond the lock-in period to benefit from potential capital appreciation.

Exit Strategy: Plan your exit strategy after the lock-in period. Decide whether you want to redeem your investment or continue holding it based on your financial goals and market conditions.

Consistency: Look for ELSS funds that have demonstrated consistency in their performance and portfolio management. Funds that consistently outperform their benchmarks are usually better choices.

Monitoring: Keep track of your ELSS investments and monitor their performance. Be prepared to switch to a different fund if a fund consistently underperforms or no longer aligns with your goals.

One can invest in tax saving mutual funds if they fall in the bracket of taxation that allows the INR 1.5 lakh exemption and they want to invest in the stock markets to avail a tax rebate.

Tax saving mutual funds are ideal for those looking for:

• Better returns than other instruments that allow tax-free investments.
• Investing purely in equity mutual funds.
• Investors with at least basic knowledge of the markets and risks related to the market.
• People looking for a tax rebate and wanting to get a better rebate than PPF can invest in ELSS. The only thing that is required is a little research and an understanding of the market and the sector that particular ELSS has invested in. If the companies in which the ELSS fund has invested in are not performing well then that particular fund will not give the desirable results.

Tax saving mutual funds are not advisable for people with no knowledge of the market and have no means or time to gain basic understanding. There have been cases where lay investors were encouraged to invest in loss-making ELSS funds, resulting in negative returns.

ELSS is better than other instruments of investments as the returns given by it are better than the other instruments. The only factor that is to be taken into consideration is research on the performance of these mutual funds.

If the mutual fund has performed well in the previous year, it is important to study how the sectors it is focused on are doing at the present and the prospects companies of your fund’s portfolio have for the future. Blindly following past performance isn’t an advisable practice when it comes to investing in the stock market.

Following are the instruments of investment eligible to get a tax rebate under Section 80C of the Income Tax Act.

Returns from ELSS can be the best in all kinds of investment options for a tax rebate, though there will be a partial tax on the returns. There can be risk factors involved with investing in the tax saving mutual funds and other investments listed above can be considered more secure, but with thorough research and effort in developing an understanding of stock market investing, one can potentially earn better returns in the long term.

Here’s how ELSS helps inventors :

1. Tax Deduction under Section 80C:
   Equity Linked Saving Schemes (ELSS) offer investors a substantial tax benefit under Section 80C of the Income Tax Act. Investors can claim a deduction of up to Rs. 1.5 lakh in the financial year of investment, effectively reducing their taxable income.
2. Strategic Tax Planning:
   ELSS funds provide investors with the flexibility to strategically plan their investments to maximize the available tax deduction. This feature allows investors to optimize their tax planning within the prescribed limit.
3. Three-Year Lock-in Period:
   ELSS funds come with a mandatory three-year lock-in period. During this time, investors cannot redeem or withdraw their investments. The lock-in period ensures that investors commit to a more extended holding period, aligning with the goal of promoting long-term wealth creation.
4. Flexibility After Lock-in Period:
   After the completion of the three-year lock-in period, investors have the flexibility to either redeem their ELSS units or continue holding them based on their financial goals. This flexibility distinguishes ELSS from other tax-saving instruments with longer lock-in periods.
5. Capital Gains Tax:
   While ELSS funds offer tax benefits on the principal amount invested, it’s essential to be aware of the capital gains tax implications. Any gains realized upon redemption after the lock-in period are subject to capital gains tax, with different rates for short-term and long-term gains.
6. Short-Term and Long-Term Capital Gains Tax Rates:
   Short-term capital gains (if redeemed within one year) are taxed at 15%, while long-term capital gains exceeding Rs. 1 lakh are subject to a 10% tax without indexation. Investors should consider these tax rates when planning their exit strategy.
7. Dual Advantage of Returns and Tax Savings:
   ELSS mutual funds provide investors with a dual advantage—potential returns from equity investments and tax savings. This combination makes ELSS a preferred choice for investors looking to optimize both financial growth and tax planning.

Though ELSS is primarily a kind of a mutual fund, the following are the differences between ELSS and fixed deposits (FDs).