Looking to save on taxes while growing your wealth?
ELSS mutual funds may be just what you need!
Equity Linked Savings Schemes (ELSS) allow Indian investors to get tax deductions under Section 80C, and they also offer a chance to earn better returns by investing in stocks.
In this article, we will look at the top-performing ELSS mutual funds in India for 2024. We’ll consider important factors like past performance, how well the funds are managed, and the balance of risk and return.
Let’s help you find the right ELSS fund that fits your financial goals and comfort with risk!
TL;DR;
- ELSS funds offer tax benefits under Section 80C while investing in equity markets for potential higher returns
- Top ELSS funds for 2024 include Quant ELSS Tax Saver Fund, SBI Long Term Equity Fund, and Motilal Oswal ELSS Tax Saver Fund
- Consider factors like fund performance history, expense ratio, and fund manager’s track record when choosing ELSS funds
- Investors can invest in ELSS funds through lump sum payments or Systematic Investment Plans (SIPs)
- ELSS funds have a shorter 3-year lock-in period compared to other tax-saving options like PPF and NSC
Table of Contents
Understanding ELSS Mutual Funds in India
ELSS mutual funds offer a unique combination of tax savings and potential wealth creation for Indian investors. These funds provide an opportunity to invest in equity markets while enjoying tax benefits under Section 80C of the Income Tax Act.
What Are ELSS Funds?
ELSS funds, or Equity Linked Savings Schemes, are tax-saving mutual funds that invest primarily in equity and equity-related securities. These funds have a mandatory lock-in period of three years, which is the shortest among all tax-saving instruments under Section 80C. ELSS funds aim to generate long-term capital appreciation by investing in a diversified portfolio of stocks across various sectors and market capitalizations.
Key features of ELSS funds:
- Equity-oriented: Invest at least 80% of their assets in equity and equity-related instruments
- Lock-in period: Three-year mandatory lock-in for each investment
- Diversification: Spread investments across different sectors and market caps
- Professional management: Managed by experienced fund managers
- Flexibility: Allow systematic investment plans (SIPs) and lump sum investments
Tax Benefits of ELSS Investments
ELSS funds offer significant tax advantages, making them an attractive option for investors looking to save taxes while building wealth. The tax benefits of ELSS investments include:
- Section 80C deduction: Investments up to ₹1.5 lakh per financial year qualify for tax deduction under Section 80C
- Tax-free returns: Long-term capital gains up to ₹1 lakh per financial year are tax-free
- Lower tax rate on gains: Long-term capital gains exceeding ₹1 lakh are taxed at 12.5% without indexation benefits
| Tax Benefit | Details |
|---|---|
| Section 80C Deduction | Up to ₹1.5 lakh per financial year |
| Tax-free Returns | Long-term capital gains up to ₹1 lakh per year |
| LTCG Tax Rate | 12.5% on gains exceeding ₹1 lakh (without indexation) |
ELSS funds offer a triple advantage of tax savings, potential higher returns, and wealth creation through equity investments. Popular ELSS funds like Axis ELSS Fund, Nippon India Tax Saver Fund, and ICICI Prudential Long Term Equity Fund have consistently delivered strong performance over the years. Investors can choose from a wide range of ELSS funds offered by various asset management companies to align with their financial goals and risk tolerance.
Top ELSS Mutual Funds for 2024
Quant ELSS Tax Saver Fund Direct-Growth
The Quant ELSS Tax Saver Fund Direct-Growth stands out as a top performer in the ELSS category. It’s known for its aggressive investment strategy and has consistently outperformed its benchmark. The fund focuses on a mix of large-cap and mid-cap stocks, aiming for high returns while managing risk effectively.
SBI Long Term Equity Fund Direct Plan-Growth
SBI Long Term Equity Fund Direct Plan-Growth is a well-established ELSS fund with a strong track record. It primarily invests in large-cap stocks, providing stability and steady growth. The fund’s consistent performance and low expense ratio make it an attractive option for conservative investors seeking tax benefits and long-term capital appreciation.
Motilal Oswal ELSS Tax Saver Fund Direct-Growth
Motilal Oswal ELSS Tax Saver Fund Direct-Growth adopts a unique investment approach. It follows a focused strategy, investing in a compact portfolio of high-conviction stocks. This fund is suitable for investors comfortable with higher volatility in pursuit of potentially higher returns.
Bank of India ELSS Tax Saver Direct-Growth
Bank of India ELSS Tax Saver Direct-Growth is an emerging player in the ELSS space. The fund maintains a balanced portfolio across market capitalizations, aiming to capitalize on growth opportunities while managing downside risk. Its performance has been steadily improving, making it a fund to watch in 2024.
HDFC ELSS Tax Saver Direct Plan-Growth
HDFC ELSS Tax Saver Direct Plan-Growth is a popular choice among investors due to its consistent performance and the brand reputation of HDFC. The fund follows a blend of value and growth investing strategies, focusing on companies with strong fundamentals and growth potential. Its diversified portfolio across sectors provides a good balance of risk and return.
| Fund Name | 3-Year Returns | 5-Year Returns | Expense Ratio |
|---|---|---|---|
| Quant ELSS Tax Saver Fund Direct-Growth | 29.82% | 39.38% | 0.71% |
| SBI Long Term Equity Fund Direct Plan-Growth | 29.89% | 28.71% | 0.95% |
| Motilal Oswal ELSS Tax Saver Fund Direct-Growth | 27.67% | 27.88% | 0.65% |
| Bank of India ELSS Tax Saver Direct-Growth | 23.92% | 30.86% | 0.96% |
| HDFC ELSS Tax Saver Direct Plan-Growth | 26.86% | 24.43% | 1.09% |
Factors to Consider When Choosing ELSS Funds
When selecting ELSS funds for investment, investors must evaluate several key factors to make informed decisions. These factors help in identifying funds that align with their financial goals and risk tolerance.
Fund Performance History
ELSS funds’ historical performance provides valuable insights into their potential returns. Investors should analyze the fund’s performance over 3-year, 5-year, and 10-year periods to assess consistency. Compare the fund’s returns with its benchmark index and category average to gauge its relative performance. For example, the Quant ELSS Tax Saver Fund has consistently outperformed its benchmark, delivering 29.82% returns over 3 years and 39.38% over 5 years.
Expense Ratio
The expense ratio directly impacts an investor’s returns. Lower expense ratios result in higher returns for investors. ELSS funds typically have expense ratios ranging from 0.5% to 2.5%. For example, the SBI Long Term Equity Fund has an expense ratio of 0.95%, while the HDFC ELSS Tax Saver Fund’s expense ratio is 1.09%. Investors should compare expense ratios across different ELSS funds to maximize their returns.
Fund Manager’s Track Record
The fund manager’s expertise and track record play a crucial role in the fund’s performance. Evaluate the fund manager’s experience, qualifications, and past performance across different market cycles. A seasoned fund manager with a proven track record of generating consistent returns is more likely to navigate market volatility effectively. For example, the Motilal Oswal ELSS Tax Saver Fund is managed by a team of experienced professionals with a strong track record in equity investments.
How to Invest in ELSS Mutual Funds
Investing in ELSS mutual funds is a straightforward process that offers flexibility to suit various investor preferences. Here’s how you can get started:
1. Lump Sum Investment:
- Involves investing a large amount at once in an ELSS fund
- Ideal for investors with a significant sum ready to invest
- Potentially captures market lows, maximizing returns
- Example: Investing ₹1,50,000 in Axis ELSS Fund at the start of the financial year
2. Systematic Investment Plan (SIP):
- Allows regular, fixed investments over time
- Suitable for salaried individuals or those preferring a disciplined approach
- Benefits from rupee cost averaging, reducing impact of market volatility
- Example: Investing ₹12,500 monthly in Nippon India Tax Saver Fund for 12 months
3. Comparison:
| Aspect | Lump Sum | SIP |
|---|---|---|
| Initial Investment | High | Low |
| Market Timing Risk | Higher | Lower |
| Flexibility | Less | More |
| Rupee Cost Averaging | No | Yes |
4. Tax Benefits:
- Both methods qualify for tax deductions under Section 80C
- Maximum deduction of ₹1,50,000 per financial year
- ELSS investments lock-in for 3 years from the date of each investment
5. Performance Impact:
- Lump sum can outperform in consistently rising markets
- SIP tends to perform better in volatile or declining markets
- Example: ICICI Prudential Long Term Equity Fund’s 5-year SIP returns often surpass lump sum returns during market corrections
6. Investor Suitability:
- Lump sum: Experienced investors with market insight
- SIP: New investors or those seeking a disciplined investment approach
7. Hybrid Approach:
- Combine lump sum and SIP for balanced exposure
- Example: Invest ₹1,00,000 lump sum in DSP Tax Saver Fund and set up a ₹5,000 monthly SIP
Investors should choose the method that aligns with their financial goals, risk tolerance, and cash flow situation. Consulting a financial advisor helps in making an well-informed choice tailored to individual circumstances.
Risks and Limitations of ELSS Funds
While ELSS funds offer attractive tax benefits and potential for wealth creation, investors must be aware of the following risks and limitations:
Market Volatility
ELSS funds invest primarily in equity markets, exposing them to market fluctuations. During economic downturns or market corrections, these funds can experience significant value drops. For example, during the 2008 financial crisis, many ELSS funds saw declines of 50% or more in their Net Asset Values (NAVs).
Lock-in Period
ELSS investments come with a mandatory 3-year lock-in period. This restriction limits liquidity and prevents investors from accessing their funds during emergencies. Investors need to plan their finances carefully to accommodate this lock-in requirement.
Limited Diversification
Most ELSS funds focus on domestic equity markets, which may lead to concentration risk. The lack of exposure to international markets or other asset classes can impact overall portfolio diversification.
Performance Variability
Past performance doesn’t guarantee future returns. ELSS funds’ performance can vary significantly over time. For example, the Axis Long Term Equity Fund delivered a 5-year return of 22.5% in 2019 but saw a decline to 11.2% by 2023.
Tax Policy Changes
While ELSS funds currently offer tax benefits under Section 80C of the Income Tax Act, future changes in tax policies could affect these advantages. Investors should stay informed about potential regulatory changes that may impact their tax-saving strategies.
Fund Manager Risk
The performance of ELSS funds heavily relies on the fund manager’s expertise. A change in fund management or poor investment decisions can negatively impact returns. For example, the DSP Tax Saver Fund experienced a decline in performance following a change in fund management in 2018.
Expense Ratio Impact
ELSS funds typically have higher expense ratios compared to index funds. These fees can eat into overall returns, especially during periods of lower market performance. Some ELSS funds have expense ratios as high as 2.5%, which can significantly impact long-term wealth accumulation.
| Aspect | Risk/Limitation |
|---|---|
| Market Exposure | High volatility due to equity focus |
| Lock-in Period | 3-year mandatory holding period |
| Diversification | Limited to domestic equity markets |
| Performance | Variability and no guarantee of past performance |
| Tax Benefits | Subject to policy changes |
| Management | Dependence on fund manager’s decisions |
| Costs | Higher expense ratios compared to passive funds |
Understanding these risks and limitations is crucial for investors considering ELSS funds. While they offer potential for tax savings and capital appreciation, investors must align their risk tolerance and financial goals with the characteristics of these investment vehicles.
Comparing ELSS Funds with Other Tax-Saving Options
ELSS funds stand out among various tax-saving investment options available under Section 80C of the Income Tax Act. Here’s how they compare to other popular choices:
ELSS vs. Public Provident Fund (PPF)
- Lock-in Period: ELSS has a 3-year lock-in, while PPF requires 15 years.
- Returns: ELSS offers potentially higher returns due to equity exposure, averaging 12-15% annually. PPF provides fixed returns, currently at 7.1% per annum.
- Risk: ELSS carries market risk, while PPF is risk-free with government backing.
- Tax Benefits: Both offer tax deductions up to ₹1.5 lakhs under Section 80C.
ELSS vs. Fixed Deposits (FDs)
- Returns: ELSS historically outperforms FDs, with average returns of 12-15% compared to 5-7% for tax-saving FDs.
- Taxation: ELSS gains are tax-free up to ₹1 lakh per year, while FD interest is taxable at the investor’s income tax slab.
- Liquidity: ELSS funds become liquid after 3 years, whereas tax-saving FDs have a 5-year lock-in.
ELSS vs. National Savings Certificate (NSC)
- Investment Horizon: ELSS offers flexibility after 3 years, while NSC has a fixed 5-year term.
- Returns: ELSS potentially generates higher returns than NSC’s fixed 6.8% interest rate.
- Risk Profile: ELSS involves market risk, NSC provides guaranteed returns.
ELSS vs. Unit Linked Insurance Plans (ULIPs)
- Costs: ELSS typically has lower expense ratios compared to ULIPs’ higher charges for insurance coverage.
- Transparency: ELSS offers clearer fee structures and portfolio disclosures than ULIPs.
- Flexibility: ELSS allows easier fund switches and redemptions after the lock-in period.
- Lock-in: ELSS has a shorter 3-year lock-in compared to NPS, which locks funds until retirement.
- Tax Benefits: ELSS offers tax deduction under 80C, while NPS provides additional deduction under 80CCD(1B).
- Asset Allocation: ELSS invests primarily in equities, NPS offers a mix of equity and debt options.
| Feature | ELSS | PPF | Tax-Saving FD | NSC | ULIPs | NPS |
|---|---|---|---|---|---|---|
| Lock-in Period | 3 years | 15 years | 5 years | 5 years | 5 years | Until retirement |
| Average Returns | 12-15% | 7.1% | 5-7% | 6.8% | Variable | Variable |
| Risk Level | High | Low | Low | Low | Moderate | Moderate |
| Tax Deduction Limit | ₹1.5 lakhs | ₹1.5 lakhs | ₹1.5 lakhs | ₹1.5 lakhs | ₹1.5 lakhs | ₹2 lakhs |
ELSS funds, such as the Quant ELSS Tax Saver Fund, HDFC ELSS Tax Saver, Axis ELSS Fund, and ICICI ELSS Fund, offer a unique combination of tax benefits, potential for high returns, and relatively short lock-in periods. These equity linked savings schemes provide investors with an opportunity to save taxes while potentially earning higher returns compared to traditional tax-saving options.
Conclusion
ELSS mutual funds stand out as a compelling investment option for Indian investors in 2024. They offer a unique blend of tax benefits short lock-in periods and potential for high returns. While other tax-saving instruments have their merits ELSS funds provide a balanced approach to wealth creation and tax efficiency.
Investors should carefully consider their financial goals risk tolerance and investment horizon when selecting ELSS funds. By choosing well-performing funds with strong management and reasonable expense ratios investors can maximize their returns while enjoying tax benefits.
As always it’s advisable to consult with a financial advisor to make informed investment decisions tailored to individual needs.
Frequently Asked Questions
What is an Equity Linked Savings Scheme (ELSS)?
An Equity Linked Savings Scheme (ELSS) is a type of mutual fund in India that offers tax benefits under Section 80C of the Income Tax Act.
It invests primarily in equity and equity-related securities, aiming to provide capital appreciation while offering tax deductions. ELSS funds have a mandatory lock-in period of 3 years, which is the shortest among tax-saving investment options.
How does ELSS compare to other tax-saving options?
ELSS offers a unique combination of tax benefits, potential for high returns, and a relatively short lock-in period compared to other tax-saving options.
Unlike fixed-income options like PPF or FDs, ELSS invests in equity markets, potentially yielding higher returns.
It has a shorter lock-in period than PPF and offers more liquidity than ULIPs. However, ELSS carries higher risk due to market fluctuations.
What are the top-performing ELSS funds mentioned in the article?
The article recommends several top-performing ELSS funds, including Quant ELSS Fund, SBI Long Term Equity Fund, and Motilal Oswal ELSS Tax Saver Fund.
These funds have shown strong performance and are considered good options for investors looking to invest in ELSS.
However, it’s important to research and compare fund performance, expense ratios, and fund manager track records before investing.
What factors should I consider when choosing an ELSS fund?
When selecting an ELSS fund, consider the following factors:
– Fund performance history
– Expense ratio
– Fund manager’s track record
– Investment strategy
– Risk profile
– Fund size and assets under management
– Consistency in returns
– Sector and stock allocation
Is ELSS suitable for all types of investors?
ELSS is suitable for investors who have a high risk tolerance and a long-term investment horizon. It’s ideal for those seeking tax benefits while aiming for capital appreciation through equity investments.
However, conservative investors or those with short-term financial goals may find other tax-saving options more appropriate. Always assess your risk profile and financial objectives before investing in ELSS.
What is the lock-in period for ELSS, and how does it compare to other investments?
The lock-in period for ELSS is 3 years, which is the shortest among tax-saving investment options.
In comparison, PPF has a 15-year lock-in, NSC has a 5-year lock-in, and tax-saving FDs typically have a 5-year lock-in period. ULIPs have a 5-year lock-in, while NPS locks in funds until retirement.
This shorter lock-in makes ELSS more liquid compared to most other tax-saving alternatives.
How are ELSS returns taxed?
ELSS returns are taxed as long-term capital gains (LTCG) since the minimum holding period is 3 years. As of 2024, LTCG on equity mutual funds exceeding ₹1 lakh per financial year is taxed at 12.5% without indexation benefits.
Dividends from ELSS funds are added to your income and taxed as per your income tax slab. It’s advisable to consult a tax professional for the latest tax implications.
Manish Sharma
https://financex.inI'm tech-savvy, loves to write about saving, investing and proper financial planning. Also, I am a blogger, share everything with 100% transparency and the best of my knowledge.