How to Invest in ELSS Mutual Funds: SBI, Axis, ICICI, HDFC

Understanding Equity Linked Savings Scheme

Equity Linked Savings Scheme (ELSS) is a type of mutual fund scheme that invests predominantly in the equity market. The fund is known to invest the majority of its block in equity and related funds while offering tax benefits to investors under Section 80C of the Income Tax Act. ELSS is a diversified scheme which provides a balance between volatility and returns to investors.

Investors have the choice of investing both through Systematic Investment Plans (SIPs) and lump sum investments. It is strictly advised that investors remain invested for at least a period of 5 to 7 years for better returns as equity investments are volatile over the short term, but tend to average out their returns in the long term.

ELSS investments feature a minimum lock-in period of 3 years which can be extended by any period of the investor’s choice i.e. no block-based extensions are required. ELSS investments have shown better returns than almost all asset classes in the longer term.

ELSS can be obtained in both open-ended and close-ended formats.

• Open-ended ELSS: This is a format in which investors can move out i.e. redeem their ELSS investment anytime they want after the 3 year lock-in period has ended. This is the most common type of ELSS scheme available in India’s equity markets. Investors can enter into i.e. invest in these schemes at their convenience.
• Close-ended ELSS: In this format, investors cannot move out of their scheme before the specified time period, which is greater than the 3 year lock-in period of the standard ELSS. The investments into such schemes can only be made during the New Fund Offer (NFO) period. Investments in these schemes cannot be made beyond this NFO period.

Also Read: Best Performing ELSS Mutual Funds for Saving Tax in 2019

Key Features of ELSS

Some important characteristics of ELSS are explained in the following sections-

• ELSS allows investors to invest via the SIP route, making it easier for them to pool in little amount of money at fixed intervals
• Being a long-term investment instrument, ELSS is minimally impacted by short-term volatility that gets balanced out in the long term. This reduces the redemption pressure on fund managers allowing them to take long term investment bets
• The primary aim of ELSS is capital appreciation along with tax benefits for investors, making it a potentially high risk-high return asset
• ELSS offers potentially higher returns as compared to other savings plans such as NSC, PPF, etc. even though the latter ones have a longer lock-in period
• ELSS has no upper limit for investment. However the tax benefits will be capped at Rs.1.5 Lakh annually under Section 80C of the Income Tax Act. Investments beyond the said limit will not provide any returns
• Redemption charges (exit load) are not applicable on ELSS. The scheme management charge designated by the total expense ratio (TER) of the scheme is lower in case of direct plans as compared to regular plans
• ELSS comes under long-term mutual funds but the lock-in period is actually the shortest among all other tax saving schemes. After the completion of this lock-in period, the investor is free to redeem his/her investment any time after the 3 year lock-in period of the ELSS has ended

Steps to Invest in ELSS Mutual Funds

ELSS investments can be made using both the online and offline modes. However, both of them involve different procedures for the submission of required documents. You can invest in mutual funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Cancelled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification such as Aadhaar or PAN)
  • Post dated cheques in the favour of the mutual fund scheme with duly filled application form/bank mandate forms

• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment. Here are the prerequisites for the same-
  • Aadhaar-based eKYC
  • Completion of registration through an authorized channel
  • Once online registration is done, investors will receive a pre-filled bank mandate on their registered email ID and a final email from NSE for confirming FATCA details

Tax Benefits of ELSS

The amount of investment in an ELSS during a financial year is eligible for exemption from income tax. ELSS is qualified for tax exemption under section 80C of the Income Tax Act 1961 up to an annual limit of Rs. 1.5 lakh. Till March 2018, redemption after completion of the lock-in period was completely tax free. However, this has now changed as long term capital gains (LTCG) and is applicable at 10% on equity redemptions in excess of Rs. 1 lakh during a financial year. No indexation benefit is applicable to these redemptions.

List of ELSS Mutual Funds to Invest

Here is a list of top 5 ELSS funds you can invest in 2020 to generate high returns and simultaneously save taxes-

Fund Name	AUM (cr.)	3 -Year Returns	5- Year Returns
Axis Long Term Equity	₹21,473	18.85%	12.04%
Aditya Birla SL Tax Relief 96	₹10,029	13.70%	10.54%
DSP Tax Saver	₹6,260	13.57%	11.60
Mirae Asset Tax Saver	₹3,066	19.28%	—
Motilal Oswal Long Term Equity	₹1,648	15.31%	14.88%

{Data as on January 21, 2020; Source: Value Research}

FAQs

Ques. How much tax can I save by investing in ELSS?

Ans. An investor can save upto Rs.46,800 per year by investing in ELSS funds. However, this is possible only if you invest Rs.1,50,000 and you fall in the highest tax bracket of 30%.

Ques. What is the lock-in period in ELSS funds and is there an exit load?

Ans. ELSS investments are known to have the lowest lock-in period of 3 years amongst all the tax saving instruments. No, ELSS funds do not have any exit load implications.

Ques. What is the maximum tax benefit that can be availed by investing in ELSS Funds every year?

Ans. Investing in ELSS funds offer a maximum tax exemption of Rs.1.5 lakh in one financial year.

Ques. Is there any tax associated with ELSS Funds ?

Ans. LTCG of 10% is applicable on ELSS funds if they are redeemed in excess of Rs. 1 lakh during a financial year.

Ques. Can I withdraw ELSS before 3 years?

Ans.No. ELSS funds cannot be withdrawn before the lock-in period of 3 years. However, that means that each SIP can be withdrawn after 3 years of being invested. Let’s say you invested Rs 10,000 in March 2017, you will be able to withdraw that amount or the units associated with that amount + returns.

Ques. Which is Better: ELSS or SIP?

Ans. Systematic Investment Plan (SIP) is nothing but a mode of investing in mutual funds such as ELSS that allow investors to pool in the money in the funds in small part at fixed, pre-defined intervals.

Ques. Does ELSS come under 80c?

Ans. Yes, ELSS investments offer tax exemption of Rs.1.5 lakh under Section 80C of the Income Tax Act.

Ques. What are the other benefits of investing in ELSS?

Ans. ELSS investments offer multiple benefits such as tax exemption, lowest lock-in period, higher returns, option of investing through SIP, power of compounding, among others. You can learn more about the benefits of investing in ELSS here.

Ques. Why should I invest in ELSS when I have other tax saving investment options?

Ans. ELSS is the only tax saving instrument to offer the lowest lock-in period of 3 years. Moreover, the returns generated from investment in ELSS are much higher than the ones offered by other tax saving investment options.