Equity Linked Saving Scheme (ELSS): How To Choose A Tax Saving Mutual Fund?

Taxes can eat away at a major portion of your income, especially if you are in a higher tax bracket. However, there are a few avenues the government has provided that you can use in order to save money on income taxes. There are many investment instruments listed by the government under the Income Tax Act of 1961 that you can use to save on taxes. The tax-saving mutual funds under the Income Tax Act of 1961 are called ELSS (Equity Linked Saving Schemes), and you can claim a tax deduction of up to ₹1,50,000 each year by investing in ELSS mutual funds. Let’s take a closer look at what an ELSS mutual fund is and how to choose the right one to invest in.

As the name of this policy suggests, Equity Linked Saving Scheme or ELSS is a type of mutual fund that invests in the equities of various companies. Section 80C of the Income Tax Act 1961 allows for a maximum tax deduction of ₹1,50,000 lakh when investing into Equity Linked Saving Schemes. If you are in the highest tax bracket where you are taxed at 30%, you can save up to ₹46,800 per year through investing in ELSS mutual funds. ELSS mutual funds are a great choice of investment as they often offer much higher returns compared to non-equity mutual funds. Another benefit of investing in ELSS is that they have the shortest lock-in period, of a minimum of 3 years. While you can invest any amount into your ELSS mutual fund investment, the tax benefit is only applicable to a maximum of ₹1,50,000 under Section 80C of the Income Tax Act, 1961.

Here are some important points that you should consider when choosing the right ELSS mutual fund to invest in:

Composition Of ELSS Mutual Fund Stocks

Since the main purpose of ELSS mutual funds is to generate the highest returns, fund managers use certain specific strategies. One of the most common strategies used by fund managers is including a larger proportion of small-cap and mid-cap stocks in some ELSS mutual funds compared to other types of equity mutual funds. While investing in mid-cap and small-cap companies can bring much higher returns, it also increases the risk of the fund losing value more rapidly when the stock market experiences a downturn. So, you should look into the composition of an ELSS mutual fund before investing. If you have an appetite for high risk, you can consider investing in these ELSS funds that have a higher proportion of mid-cap and small-cap stocks. However, if you have a lower appetite for risk-taking, you should invest in those ELSS funds that primarily consist of large-cap stocks.

Past Performance Of ELSS Mutual Funds

It’s not just important to look at the composition of ELSS mutual funds for risk assessment. You also need to look at the past performance of ELSS mutual funds to decide which mutual funds have the chance to provide stable higher returns compared to other lower-performing funds. Generally, mutual funds that have a long history of stable positive returns are good choices to invest in. However, you should not only look at the recent history of their performance but rather their performance since the beginning of the mutual fund. 

Disclaimer: This article does not intend to pass on any financial advice and BQ Prime does not endorse any of the funds/schemes mentioned above. Please invest at your own discretion.