5 Points to Note Before Investing in ELSS Tax Saving Funds

Every year, as April comes around, we're hunched for ways to save tax. If you've been there, you've probably done your fair share of research on ELSS or Equity Linked Saving Scheme.

Often referred to as a tax-saving mutual fund scheme, ELSS lets you claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act (ITA) while simultaneously investing in equity and equity-linked securities. 

Yes, ELSS funds are incredibly helpful in bringing down your taxable income and accumulating higher wealth, but you still need to consider a few things as explored below.

1. Factor the portfolio composition

Different ELSS funds have different ranging investing styles and asset compositions. Looking at the underlying theme will give you a better perspective of the strategies and approaches being used for portfolio building. Especially if you're just debuting in the market.

Consider the overall composition while comparing mutual funds. If it is mid-cap biased, there's a higher risk involved and medium-risk for large-caps.

2. Compare the expense ratio

This one's basic arithmetic. The lower the amount you're spending per unit for fund management, the higher will be your take-home returns. The ratio essentially tells you the real return you'll be earning over the investment term.

Besides, as the value of the fund increases, so will its expense ratio. That's why you should always select ELSS funds based on their expense ratio.

Additional Read: When is the Right Time to Sell Your ELSS Investment?

3. Consider the lock-in period

ELSS funds have a mandatory lock-in period of three years, so you cannot redeem the units before the maturity date. Now, you can earn good returns during this time but to accumulate higher returns, you should stay invested for a longer term, ideally between five and seven years!

So choose ELSS funds only if you can commit for the long haul and manage your liquidity needs around that.

4. Check the consistency of returns

While ELSS funds are meant for savings, you shouldn't forget their high potential to generate good returns. That's why you should select a scheme by evaluating its past fund performance against benchmark and competitor metrics. If its long-term performance has been good, the fund is more likely to deliver high returns.

5. Gauge the risk level

Technically speaking, ELSS funds carry a considerable amount of risk, given that 80% of their portfolio comprises equity-linked products. However, not all funds are created equal and cater to a wide variety of risk-takers. Not to mention, many experts recommend staying invested in ELSS over the long term to counterbalance the risk and gain greater rewards.

So, ensure a fund aligns with your risk appetite and investment objectives to find a good match.

Additional Read: Debunking 9 Popular Myths about ELSS funds

To sum up

While ELSS funds are unarguably one of the most convenient tax-saving instruments, the wealth accumulated over the investment term is still taxable. Luckily, long-term ELSS gains only carry a 10% tax rate if the income exceeds 1 lakh. Any amount below this benchmark is completely tax-free!

Wondering how to begin with ELSS funds? Partner with Tata Moneyfy's mutual fund app and compare different funds online across parameters today!