ELSS Mutual Funds for Tax Savings: Compare and Invest

ELSS Mutual Funds for Tax Saving

People actively seek savings options in any financial year to maximise their tax benefits under Section 80C. Equity-Linked Savings Schemes (ELSS) have emerged as a favourite among the various choices available. This is evidenced by their impressive growth of 40.9% in FY 2024, with investments soaring from ₹151,751 crores to ₹213,760 crores. ELSS funds offer substantial tax benefits and present a robust opportunity for wealth creation.

This blog will explore the best mutual funds for tax saving, their unique advantages, and how you can make informed investment decisions. By the end of this article, you will have a comprehensive understanding of the top tax-saving mutual fund schemes and how to leverage them for optimal tax benefits.

Understanding ELSS

Equity-Linked Savings Schemes (ELSS) are mutual funds that primarily invest in equities. Section 80C of the Income Tax Act 1961 designs these to provide tax benefits.

ELSS funds allow you to invest up to ₹1.5 lakh per financial year, and the amount invested qualifies for a tax deduction. One of the standout features of ELSS is its relatively short lock-in period of three years, which is the shortest among all Section 80C investment options.

How ELSS Helps You Save ₹46,800 in Taxes

Investing in ELSS can help you save a significant amount in taxes, up to ₹46,800, depending on your tax slab. Here’s how:

1. Tax Deduction

By investing ₹1.5 lakh in ELSS, you can reduce your taxable income by this amount under Section 80C.

2. Tax Calculation

For an individual in the highest tax bracket of 30%, the tax saved would be ₹1,50,000 x 30% = ₹45,000. Including the applicable cess (4%), the total tax saving is ₹46,800.

ELSS Plans to Consider

Now that you understand how ELSS helps save tax, let's explore some of the best mutual funds. The table below (as of May 2024) lists top-performing ELSS funds based on their returns and other key parameters:

Things to Consider When Choosing an ELSS Fund

Selecting the right Equity-Linked Savings Scheme (ELSS) is crucial for optimising your tax benefits and returns. Here are key factors to consider:

1. Fund Performance

Why It Matters: A fund's historical performance is a strong indicator of its potential future returns and stability. By analysing performance over different periods (1 year, 3 years, 5 years), you can gauge how well the fund has managed market volatility and economic changes.

- Consistency: The fund management team's consistent performance over various timeframes suggests that it is adept at navigating different market conditions.
- Benchmark Comparison: Compare the fund’s returns against its benchmark index to see if it consistently outperforms the market.
- Peer Comparison: Evaluate the fund’s performance relative to other ELSS funds to determine its competitive edge.

Example: A fund like Mirae Asset ELSS Tax Saver Fund, which shows strong returns across 1, 3, and 5 years, demonstrates consistent performance and reliable management.

2. Fund Manager Expertise

Why It Matters: The expertise and experience of the fund manager play a pivotal role in the fund’s performance. An experienced fund manager with a solid track record can make informed decisions that enhance the fund’s returns.

- Track Record: Look at the fund manager’s history with other funds. Successful past performance can be a good indicator of future potential.
- Investment Style: Understand the fund manager’s investment philosophy and strategy. Are they growth-oriented, value-focused, or balanced in their approach?

Example: If a fund like DSP ELSS Tax Saver Fund has a well-regarded manager who consistently delivers high returns across different market cycles, it’s a positive sign of its potential.

3. Expense Ratio

Why It Matters: The expense ratio is the annual fee charged by the fund to manage your investment. A higher expense ratio suggests that more of your returns are used to cover management costs, thereby reducing your gains.

- Impact on Returns: Lower expense ratios help retain more investment returns. Over the long term, even small differences in expense ratios can significantly affect your investment value.
- Comparative Analysis: Compare the expense ratios of similar ELSS funds. A fund with a lower expense ratio but similar performance to its peers is often a better choice.

Example: Choosing a fund like Kotak ELSS Tax Saver Fund with a competitive expense ratio can enhance your net returns over time.

4. Portfolio Composition

Why It Matters: Understanding where the fund invests its money gives you insights into the risk and growth potential of the fund. A well-diversified portfolio can mitigate risks and provide balanced growth.

- Sector Allocation: Check the distribution of investments across different sectors. A diverse sector allocation can protect against sector-specific downturns.
- Top Holdings: Look at the fund’s top holdings to ensure they align with your investment goals and risk tolerance. High exposure to a single stock or sector can increase risk.
- Investment Strategy: Evaluate whether the fund focuses on high-growth stocks, stable large-caps, or a mix. This can influence the fund's risk-return profile.

Example: A fund like Bandhan ELSS Tax Saver Fund with a diversified portfolio spread across various sectors can reduce the impact of volatility and provide more stable returns.

By carefully considering these factors, you can make an informed decision that aligns with your financial goals and risk tolerance.