New Delhi, November 23: Mutual funds, especially through the Systematic Investment Plan (SIP) route, have become a preferred tool of investment for savvy investors in India. However, many traditional investors, whose primary investment goal is to save tax, still don’t know that they can do so using mutual funds as well. Hence they continue to invest in traditional products like PPF, insurance and long-term fixed deposits for their tax saving needs.

While such traditional products do help in saving tax, the returns on them are quite conservative compared to mutual funds that invest in equity market. Here comes ELSS, or Equity Linked Savings Scheme, which can get investors returns of mutual funds while also helping them claim tax deduction under Section 80C of the Income Tax Act.

Simply put, ELSS is a type of diversified equity mutual fund, which qualifies for tax exemption. One can invest in ELSS through an SIP, or in lump sum. And being an equity-linked scheme, these are usually high-risk-high-return assets. However, one can minimize their risk by investing in the right product.

The biggest distinguishing feature about ELSS is that they have a compulsory lock-in period of only three years, the shortest lock-in across categories when it comes to tax-saving instruments. Also, the minimum investment amount can be as low as Rs 500, with no upper limit, which means that investors can invest as per their risk appetite in equities to avail higher returns.

Being equity investment instrument, ELSS funds involve higher risk compared to other traditional schemes which have assured and fixed returns. However, there’s a variety of ELSS schemes which one can choose as per their risk profile. For those not looking for too much volatility, they can opt for funds which invest in steady blue-chips. And those who want better returns and doesn’t mind risk can go for funds which invest in smaller-sized companies.

To be able to invest in an ELSS fund, all one needs is a demat account. And compared to other investment alternatives such as five-year FDs and PPF, ELSS have been generating inflation-beating returns that won’t just save tax but would also help in growing wealth simultaneously, and while being comparatively more liquid considering their shortest lock-in period.