ELSS Funds: Providing Twin Benefits Of Equity Returns And Tax Benefits, Here’s How They Performed

Equity-linked savings schemes (ELSS) are a type of equity-oriented mutual fund that offer investors the twin benefits of equity returns along with tax-saving opportunities. This is also the reason why they are known as tax-saving mutual funds.  

They provide benefits under Section 80C of the Income-tax Act, 1961, thus allowing the individual investor to reduce their taxable income by an amount equal to the investment made, subject to the overall limit of Rs 1.5 lakh. They also come with a long-in period of three years.

As of July 15, 2023, the ELSS mutual fund category has generated an average return of 24.93 per cent in the last one year.

Maximising Tax Savings

ELSS funds provide income tax benefits of up to Rs 1.5 lakh under the overall exemption available under Section 80 of the Income-tax Act, 1961. Though one can choose to invest a larger sum, any amount in excess of the threshold limit of Rs 1.5 lakh will not qualify for tax benefits under Section 80C.  

The minimum investment required is Rs. 500 and in multiples thereof.

Under ELSS 2005, as notified by the Union Ministry of Finance, ELSS funds must invest at least 80 per cent in equity and the balance 20 per cent in cash or debt and money market instruments.

Taxation And Liquidity

ELSS come with a mandatory lock-in period of three years. As such, any gain is treated only as long-term capital gains (LTCG). LTCG of up to Rs. 1 lakh per year are tax-free, while gains exceeding this attract a LTCG tax of 10 per cent.

ELSS also offer more liquidity than other tax-saving instruments. In fact, ELSS offer the shortest lock-in among all tax-saving instruments. Other instruments, such as tax-saving fixed deposits have a lock-in of five years, while Public Provident Fund (PPF) has lock-in of 15 years.  

Performance Insights

Over a one-year period, ELSS funds provided a category average return of 24.93 per cent. In terms of 1-year returns, the top performers among the 34 listed funds in the Association of Mutual Funds in India (Amfi) website were as follows: SBI Long Term Equity Fund (32.69 per cent), Motilal Oswal Long Term Equity Fund (31.88 per cent), JM Tax Gain Fund (29.40 per cent), ITI Long Term Equity Fund (28.75 per cent), and Bandhan Tax Advantage Fund (28.52) per cent.

The lowest return among ELSS was 17.07 per cent, while the highest return was 32.69 per cent, a difference of 15.62 per cent.  

Out of the 34 ELSS funds, a majority of them (19 funds) performed above the category average of 24.93 per cent.

In terms of three-year returns, the highest was Quant Tax Plan at 41.89 per cent.

Here too, majority of the funds, (18 out of 34), performed above the three-year average return of 26.23 per cent.

Risk Factors: Volatility and Equity Exposure

As ELSS funds are equity-oriented, they are prone to daily price fluctuations, which make them volatile in nature. ELSS funds can invest in large-, multi-, or mid-cap stocks.

Typically, most ELSS are oriented towards large-cap stocks, which is considered to be least volatile. However, individual fund portfolios may vary.  

For instance, the top-performing SBI Long Term Equity Fund has allocated 97 per cent of its funds to equity, with 68 per cent invested in large-cap stocks. Similarly, the Motilal Oswal Long Term Equity Fund has invested 99.87 per cent in equity, with 55 per cent allocated to large-cap stocks.

As an investor, investing in ELSS will allow you to strategically save taxes while potentially earning significant returns from equity.  

However, it is important to carefully assess the risks associated with equity investments and choose funds that align with your individual risk appetite and financial goals.