Equity Linked Savings Scheme, or ELSS, are one-of-its kind mutual funds that have a lock-in period of three years and enable investors to get a high exposure to equity while offering tax exemption at the same time.
These schemes are also referred to as tax-saving mutual funds since investors are entitled to an exemption of up to ₹1.5 lakh in their taxable income under section 80C of the Income Tax (I-T) Act, 1961.
According to the Sebi categorisation of mutual funds, ELSS mutual funds refer to the schemes that invest a minimum of 80 percent of their assets in equity in accordance with equity linked saving scheme, 2005.
There are 42 mutual fund schemes in this category with total assets under management (AUMs) amounting to ₹1.76 lakh crore as on July 31, 2023, reveals the AMFI (Association of Mutual Funds in India) data.
To put this figure in perspective, the total assets under management of large cap, small cap and focused mutual funds amount to ₹2.66 lakh crore, ₹1.82 lakh crore and ₹1.12 lakh crore, respectively on July 31.
The ELSS funds, as a category, have delivered a CAGR (compound annual growth rate) return of 13.34 percent in the past one year, shows the MorningStar data. The corresponding returns for the past three and five years are 21.98 percent and 12.18 percent, respectively.
| Tenor | Return (%) |
| 1 year | 13.34 |
| 3 years | 21.98 |
| 5 years | 12.18 |
(Source: MorningStar data as on Aug 21)
4 key reasons to invest in ELSS funds
Tax saving: Investors get a tax exemption of up to ₹1.5 lakh against their investment in these schemes under section 80C of the Income Tax Act.
However, investors must be aware of the fact that the upper cap of ₹1.5 lakh encapsulated all investments put together and not ELSS alone. The other investments include, but not limited to, NSC, PPF, life insurance premium, ULIP, tax saving FDs, senior citizens savings scheme (SCSS) and principal repayment towards home loan.
Three-year lock-in: Since these schemes have a three-year lock-in period, chances of booking profits are higher since investors are more likely to witness growth in equity investment when they stay invested for a longer duration.
Considerable exposure to equity: These schemes are usually meant for investors with a higher risk appetite. Since these schemes invest 80 percent of their assets, these schemes enable investors to get a substantial exposure to equity.
Insulated from worries over fluctuation: Since investors have locked-in their investment for a period of three years, they liberate themselves from the worries over day-to-day market fluctuation of their investments.
Investors will naturally have no incentive to monitor the NAV (net asset value) of their mutual fund units on a regular basis when they are fully aware that their investments are locked for a foreseeable period.
To sum up, investing in ELSS is a good bet for investors with a high-risk appetite and those who are seeking a tax exemption. However, the key incentive for retail investors to opt for mutual funds in general is that they are quite liquid and one can exit as and when they want. ELSS – on the contrary -- come with a three-year lock-in and hence, are devoid of this flexibility.
So, if an investor is comfortable with the lock-in, ELSS mutual funds are a way to go.
