Top 10 ELSS tax-saving mutual funds have earned 32% return in 3 years; benefits of investing in these MFs

It is common for taxpayers, particularly those in the salaried class, to make last-minute investments to avail of tax benefits under Section 80C of the Income Tax Act as the financial year-end approaches. Section 80C of the Income-tax Act, 1961 allows individuals to claim deductions on investments made in specified instruments such as Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), tax-saving fixed deposits, equity-linked savings schemes (ELSS), and life insurance premiums, among others, up to a maximum limit of Rs 1.5 lakh per annum. Making these investments not only helps taxpayers save taxes but also encourages them to save and invest for their future financial goals.

Do keep in mind that the section 80C benefit is only available for those opting for the old tax regime.

Also read: Tax-saving guide for FY 2023-24

While taxpayers should plan their tax-saving investments throughout the fiscal year, many individuals tend to become more proactive in the Jan-Feb-March months, when the financial year-end is approaching.

According to a recent Times of India news report, between April 2022 and Jan 2024 – during the first nine months of each fiscal – ELSS recorded an average monthly net outflow of Rs 77 crore. In comparison, the corresponding figure for Jan-Feb-March in the same years jumped to Rs 917 crore, the Times of India news report quoted the data released by the Association of Mutual Funds in India (AMFI).

What is ELSS

As per the AMFI website: “Equity-Linked Savings Scheme (ELSS) is an equity mutual fund investment that invests at least 80 per cent of its assets in equity and equity-related instruments. ELSS can be open-ended or close ended. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of Rs 1.5 lakh. The amount you invest in ELSS is deducted from your taxable income, which helps you lower the amount of income tax you are liable to pay. Investments in ELSS are subject to a three-year lock-in period.”According to investment managers and financial advisers, on several counts, ELSS floated by fund houses are the best tax saving options.Also read: How to invest in tax-saving ELSS mutual funds online

Advantages of ELSS

One of the biggest advantages of ELSS is the lower lock-in period of three years. Compared to other investment products like the tax-saving bank FD and the post office national savings scheme have a lock-in of five years, PPF comes with a lock-in of 15 years. Further, returns from ELSS are market-linked and it has the potential to generate higher returns in the long term when compared to fixed-income products.

Top ELSS mutual funds

Source: Value Research; annualised returns in % as on 28 Feb 2024.

How to invest in ELSS

Investors can make a lumpsum investment or can stagger investments using a systematic investment plan (SIP). An investment can be made in one scheme or in multiple schemes. The minimum investment amount in a scheme is Rs 500.

Taxpayers, especially those in the salaried class, often rush to make last-minute investments as the financial year-end approaches to avail tax benefits under Section 80C of the Income Tax Act. Section 80C allows individuals to claim deductions on investments in instruments like PPF, EPF, NSC, tax-saving FDs, ELSS, and life insurance premiums, up to Rs 1.5 lakh per annum. These investments not only help save taxes but also promote saving and investing for future financial goals.

It’s important to note that Section 80C benefits are available only to those opting for the old tax regime.

Read: Tax-saving guide for FY 2023-24

While taxpayers should ideally plan their tax-saving investments throughout the year, many tend to be more proactive in the months leading up to the financial year-end.

According to a report in Times of India, ELSS saw a significant increase in investments in Jan-Feb-March compared to the previous months. The data from the Association of Mutual Funds in India (AMFI) revealed a jump in net outflows during these months, indicating a surge in ELSS investments.

Understanding ELSS

ELSS is an equity mutual fund that invests at least 80% of its assets in equity and equity-related instruments. Investments in ELSS qualify for tax deductions under Section 80C, with a lock-in period of three years. Investment experts recommend ELSS for its potential to provide higher returns compared to other tax-saving options.

Benefits of ELSS

One key advantage of ELSS is its shorter lock-in period of three years, along with the potential for higher market-linked returns. ELSS stands out from other tax-saving options like PPF, bank FDs, and NSC, which have longer lock-in periods.

Top ELSS mutual funds