What is ELSS in Mutual Funds?

Investors are searching for the best investment opportunities that will lead them to enhance their wealth. So, in the world of investment, there are several schemes available, and most of them will offer returns. If you are an experienced investor, understanding the differences between each plan is crucial to making informed decisions. This is where ELSS mutual funds get the complete attention of the market. 

This comprehensive guide will teach you about the ELSS mutual funds meaning, features, benefits, factors to consider before investing, and the similarities between ELSS and mutual funds. 

What are ELSS Mutual Funds?

ELSS mutual funds full form Equity Linked Savings Scheme, is a type of strategy that is mainly invested in equities and equity-related instruments. It is also called a tax saving scheme because it offers tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act. ELSS is only a kind of mutual fund eligible for tax deductions, but it has a mandatory lock-in period of 3 years. That’s why ELSS is considered the ideal scheme for investors who are seeking tax savings along with long-term capital growth. 

What are the Features of ELSS Funds? 

There are so many features you can explore in ELSS funds, that is, if you invest up to ₹1.5 lakh in an FY you are eligible for tax deduction under Section 80C of the Income Tax Act. The investors can invest through both Systematic Investment Plans (SIPs) and Lump Sum payments. For the payouts, you can choose the Growth option (returns are invested) or IDCW (Income Distribution cum Capital Withdrawal) as per your choice. After you have invested, a major portion of the fund, at least 80%, is invested in equity or equity-related instruments. So, they have the potential to offer higher returns over the long term. But ELSS funds have a lock-in period of three years so the investor can’t make a premature exit.   

What are the Benefits of ELSS Funds?

Tax Savings	You can claim a tax deduction of up to ₹1.5 lakh per FY under Section 80C Income Tax Act.
Short Lock-in Period	ELSS has a 3-year lock-in, the shortest among all tax-saving instruments.
Wealth Creation	Being equity-based, these funds offer the potential for higher long-term returns compared to other options.
Investing via SIP	You can invest through a Systematic Investment Plan (SIP), making it easier to build wealth.
Dual Benefit	You can claim a tax deduction of up to ₹1.5 lakh per FY under Section 80C Income Tax Act.

Factors to Consider Before Investing in ELSS

Before you invest in ELSS, you have to consider some major factors of it. If you aren’t aware of it, it will lead to losses. So, make sure you are knowledgeable and qualified for the investment.  

🔸 Lock-in Period: First you have to understand that ELSS has a mandatory 3-year lock-in, so you cannot redeem your investment before that period.  

🔸 Market Risk: Based on the stock market performance ELSS will fluctuate because of the investment in equities.  

🔸 Investment Horizon: Treat ELSS as a long-term investment that will manage market volatility and maximize your growth.  

🔸 Tax: You get the tax benefits under Section 80C, but it’s only applicable for your gains above ₹1.5 lakh per FY. 

🔸 Check Fund Performance: You have to check the past performance of the fund and the fund manager’s track record.  

What is Similar Between ELSS and Mutual Funds? 

The similarities between ELSS and Mutual Funds are detailed below;

🠖 Fund Structure 

ELSS and mutual funds are pooled investment vehicles, and they are managed by professional fund managers.   

🠖 Diversification 

Both are invested across a range of securities including stocks, sectors, etc. help to reduce overall investment risk.   

🠖 Investing Options 

The investors can invest in ELSS and mutual funds through SIPs (Systematic Investment Plans) and Lump Sum.   

🠖 Managed by AMCs 

Both funds are managed by Asset Management Companies (AMCs) under the SEBI regulations.  

🠖 Market-linked Returns 

ELSS and mutual funds offer market-linked returns, depending on the performance of the underlying assets.  

ELSS Vs Mutual Funds 

Criteria	Regular Mutual Funds	ELSS (Equity Linked Savings Scheme)
Tax Benefit	No tax benefit	Yes, under Section 80C (up to ₹1.5 lakh)
Lock-in Period	No holding period	3 years (mandatory)
Liquidity	High liquidity	Limited due to lock-in
Objective	Wealth creation	Tax saving and wealth creation
Equity Allocation	Varies based on fund type	Minimum 80% in equities
Returns	Market-linked (equity/debt/hybrid)	Market-linked (equity-based)
Ideal For	All investors	Long-term and tax-saving investors
Tax on Gains	Same as equity funds	LTCG above ₹1 lakh taxed at 10%

Real-Time Example 

If you want to invest ₹1,50,000, you have two options to invest they are; 

🠖 ELSS 

🠖 Regular Mutual Fund

If you choose ELSS, you must invest ₹1,50,000 in an equity fund and get a tax deduction under Section 80C Income Tax Act. But your money is locked in for the coming 3 years.  

If you choose a regular equity mutual fund, you still invest ₹1,50,000 but you won’t get any tax reductions and there is no lock-in period so you can withdraw it anytime.  

Conclusion 

ELSS mutual funds offer you a smart way to enhance your wealth through saving taxes under Section 80C. It has a short 3-year lock-in, that’s why it is an ideal choice for long-term investors. If you want to increase your returns by achieving tax benefits ELSS mutual fund is the best. Make smarter tax-saving investments with ease by exploring ELSS funds on Navia Markets! 

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DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.