Top 5 ELSS Funds to Invest in 2023

What are ELSS funds?

ELSS funds or Equity Linked Savings Scheme funds, are schemes that invest mainly into equity. They are also considered to be a type of open ended mutual funds. ELSS funds come with the dual benefit of capital appreciation and tax saving. Under Section 80C of Income Tax Act, 1961, you can get a tax exemption of up to Rs. 1,50,000 from the annual taxable income, which is the highest in India. ELSS Funds have a minimum lock-in period of 3 years, the shortest amongst all tax-saving investment options.

Through ELSS funds you can invest in a diversified portfolio of equity stocks. ELSS funds also offer the benefit of liquidity as they can be redeemed after the lock-in period. One thing to note, the income you earn under this scheme at the end of the 3-year tenure is considered as LTCG or Long Term Capital Gain, which is taxed at 10% in case the amount is above Rs. 1,00,000.

In short, ELSS funds are a wise choice of investment as they are a tax-saving option that can generate high returns.

Features of ELSS funds

ELSS mutual funds come packed with a lot of features. Let’s take a look at them.

• ELSS funds have the shortest lock-in period of just 3 years.
• ELSS funds have no maximum investment amount and the minimum amount depends from fund to fund.
• You can get tax exemption of up to Rs. 1,50,000 under Section 80C of Income Tax Act, 1961.
• ELSS funds are the only investment scheme that provide tax-savings with a chance to enjoy returns.
• Though the portfolio of ELSS funds majorly consists of equities, you can also have some exposure to field-income assets.
• They come with twin benefits, i.e. tax saving and wealth building.

How do ELSS mutual funds function?

With ELSS funds, you can invest in a predetermined percentage of listed company equities. So, it’s best to keep two things in mind while selecting the companies – market capitalization (Large Caps, Mid-Caps, Small Caps) and industry sectors. With these funds, wealth appreciation can be maximized over a period of time. The fund manager selects equities by researching the market thoroughly to ensure the best risk-adjusted portfolio returns. To save more tax, it is advisable to gain knowledge of tax-saving strategies.

Things to Keep in Mind Before Investing in ELSS

Investing in an ELSS mutual fund is a profitable investment, but there are certain things to keep in mind:

• Lock-in Period: ELSS mutual funds have the shortest lock-in period of 3 years, before which, you cannot withdraw the amount. Also, for better returns, invest for 5 or 7 years minimum.
• Portfolio Composition: Always consider portfolio composition while investing in ELSS funds. For mid-caps, the risk is higher than large-caps.
• Consistency of Returns: For getting good returns always evaluate its past fund performance against benchmark and competitor metrics. An investment of more than 5 years offers better returns.
• The Risk Level: ELSS funds involve different risk factors. So a proper research will help in identifying the low risk funds.

Pros of ELSS Mutual Funds

There are some advantages of ELSS funds. Let’s take a look at them.

• Tax Savings: First and foremost advantage of this type of fund is that it offers tax savings on your investment. You can get an exemption of up to Rs. 1,50,000 each year under Section 80C of Income Tax Act, 1961.
• Shortest Lock-in Period: ELSS funds come with the shortest lock-in period of only 3 years. This not only encourages others to start investing at an early age, but it also makes it stand out from other investment schemes. 
• Lower Tax on Gains: In comparison to short-term capital gains which are taxed at 15%, ELSS funds have a lower tax percentage of only 10%, provided the gains are above Rs. 1,00,000.
• Higher Returns: Since ELSS funds are connected to the equity markets, the returns are higher than any basic savings plan can offer. They also provide better returns than other tax-savings schemes.
• No Need to Redeem After 3 Years: Another advantage of an ELSS fund is that you don’t have to redeem it after the passing of 3 years. You can continue the investment even after that.

Cons of Investing in ELSS Funds

ELSS Funds come with many advantages, but there are a couple of cons associated with it too. Let’s take a look at them.

• A Cap on Tax Exemption: The first disadvantage of an ELSS fund is that the tax exemption is only applicable up to Rs. 1,50,000, irrespective of the amount of the investment you made. For example, if you made an investment of Rs. 10,00,000 over a fiscal year, the exemption will only be worth Rs. 1,50,000.
• Limited Tax Benefits: As per Section 80C, the tax exemption in ELSS funds include extra items like PPF and life insurance amongst others. That means, if the exemption already amounts to Rs. 1,50,000, you won’t get an exemption on your ELSS funds.

Best ELSS Funds of 2023

The best ELSS funds to invest in 2023 are:

• Quant Tax Plan Fund
• Parag Parikh Tax Saver Fund
• Mirae Asset Tax Saver Fund
• Canara Robeco Equity Tax Saver Fund
• Bandhan Tax Advantage (ELSS) Fund

Conclusion

ELSS funds offer tax benefits, better returns in comparison to other investment options like Equity, FMP and FDs, making it a preferred investing option for majority of people. They offer profitable options with better returns and trade-offs. It is a wise decision to invest in them, but before you do, make sure you research thoroughly, so that you can pick out the best fund.