ELSS funds: Meaning, features and how to invest

Mutual funds are one of the most popular investment avenues in India. Primarily, mutual funds pool money from investors and invest in the specified asset class as per the objective of the scheme. There are various types of mutual funds, a popular one being the Equity Linked Savings Scheme (ELSS) because of its tax benefits. Let’s understand what an ELSS mutual fund is.

What are ELSS mutual funds?

ELSS mutual funds are a category of mutual funds where a majority of the funds are invested in equity shares and equity-related instruments. They are ideally suitable for long-term investors who wish to earn market-linked returns but don’t have adequate knowledge or time to do market research and select the right stocks for investments.

Features of ELSS funds

• Potential for wealth creation: ELSS funds invest at least 80% of their assets in equities, which offers potential for wealth creation in the long term.
• Tax savings: Investments in ELSS funds are eligible for a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act for each financial year (applicable in case of old tax regime only).
• Lock-in period: ELSS funds come with a lock-in period of 3 years. This means you cannot withdraw your investments until three years from the date of investment.
• Dual benefits: ELSS funds offer the dual benefits of investment and tax savings.
• Diversified portfolio: ELSS funds maintain a diversified portfolio by investing in different stocks across sectors and market caps, thereby reducing concentration risk.

Ways of investing in ELSS mutual funds

• Systematic Investment Plan (SIP): A fixed amount gets deducted from your bank account and is invested in the mutual fund scheme each month. This helps you develop the habit of investing small amounts regularly.
• Lump sum investment: This involves investing a large sum of money in the ELSS mutual fund scheme at once instead of regular investments over a period of time.

Things to consider before investing in ELSS funds

• Historical fund performance: Check how the fund has performed in different market cycles and over longer time frames.
• Fund manager: Check the fund manager’s experience and competence in stock and sector selection.
• Diversification: Evaluate the fund's exposure to large-cap, mid-cap, and small-cap segments. Also, check the concentration in top stocks and sectors.
• Risk parameters: Compare key risk-return ratios such as Sharpe ratio, Alpha, Beta, and Standard deviation with peers in the category. Select the fund with a higher Sharpe ratio and lower Standard deviation and Beta among peers.

Also Read: Mutual Fund vs. SIP: What’s the difference

In a nutshell

ELSS mutual funds not only offer tax-efficient returns but also have the potential to beat inflation over the long term due to their exposure to the equity asset class. As diversified equity funds, ELSS can be a good option for investors looking to save tax and build wealth over the long term. If you are willing to invest in ELSS, Axis Bank provides a wide range of options from various fund houses.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.