When we think of “Mutual Funds,” our mind often drifts to a Large Cap Fund or maybe a Mid Cap or a Flexi Cap fund. The equity-linked savings scheme or ELSS category only occurs to us when someone mentions tax-saving options. However, despite our low mindshare, the ELSS continues to be a dominant category in the Mutual Fund space with AUMs of over Rs. 1.35 lakh crores across 1.27 crore folios, which makes ELSS the largest category in terms of folios.
To better understand ELSS, we will look to answer some of the most common questions related to this category that a beginner or even a seasoned investor might have. The aspects that we will explain in this blog will include what an ELSS is, what tax benefits it offers, how is the lock-in period calculated in ELSS, especially for SIPs, and the performance of ELSS funds. Lastly, we will look at how to find the best ELSS funds to make investment convenient for you.
What Are ELSS Funds?
ELSS is an acronym for Equity Linked Savings Scheme and can be described briefly in 3 sentences.
One, ELSS is an open-ended Mutual Fund where at least 80% of your money is invested in stocks. Two, these schemes help you save taxes by providing benefits under Section 80C of the Income Tax Act. And lastly, these schemes have a lock-in period of three years.
So by construct, an ELSS competes with other instruments like the PPF, NPS, a tax saving fixed deposit, national savings certificate, etc., for a share of the tax conscious investor’s wallet. But unlike these other instruments, which are mostly fixed income products, an ELSS is a pure-play equity product. This means ELSS is labeled more as a wealth creation product rather than a savings product.
Thus, much like all equity funds, the ELSS does follow a volatile path to progress and offer returns with a lot of ups and downs. But it does compensate for this volatility by offering potentially higher returns.
Tax Benefits Of Investing In ELSS Funds
Investments made in an ELSS fund are eligible for tax benefits under Section 80C of the Income Tax Act. While there is no upper limit to the amount that can be invested, a maximum of Rs. 1.5 lakh is eligible for a tax deduction as per the Income Tax rules.
In fact, this Rs. 1.5 lakh is an aggregate number, which means this Section 80C deduction includes your investment in other tax-saving instruments like provident fund, national savings certificate, life insurance premium, and a few more products.
Lock-In Period In ELSS Funds
All tax-saving investment products have a lock-in period. For instance, the National Savings Certificate and tax-saving fixed deposits have a 5-year lock-in. The Public Provident Fund has a 15-year lock-in. And NPS investments are fully withdrawable only at the time of retirement.
Comparatively, the ELSS category has the shortest lock-in period, with all funds within this category requiring a minimum holding period of 36 months before these units can be redeemed. For example, if you received 100 units in an ELSS fund on the 1st of January 2018, then you can redeem these 100 units only after 3 years, i.e., on or after 1st January 2021.
One confusion that many investors have is on the treatment of SIPs or systematic investment plans in the ELSS category. So let’s extend our example and this time you are doing a SIP of Rs. 1,000 every month in an ELSS fund, with the first SIP installment starting from the 1st of January 2018.
This means Rs. 1,000 is invested on the 1st of Jan, then another Rs. 1,000 on the 1st of February, then another Rs. 1,000 on the 1st of March, and so on.
In SIPs, each transaction or each installment needs to be treated independently when calculating the 36-month holding period. This means the units you received against your purchase on 1st Jan 2018 would be redeemable on 1st Jan 2021, as per the 36-month holding period rule.
And by that same logic, the units that were received against the 1st Feb 2018 installment will be redeemable on 1st Feb 2021. Likewise, the units that were received against the 1st Mar 2018 installment will be redeemable on 1st Mar 2021, and so on. That’s how this cycle goes.
Redemption Of SIP Investments From ELSS Funds
|Transaction Type||Invested Date||Eligible Date For Redemption|
Keeping track of how many units or what amount is redeemable in any given month can be a little cumbersome. And this is where the ETMONEY app can come in handy.
If you invest in ELSS funds via the ETMONEY app, we take care of this redeemable calculation part. So, when you get to the process of redeeming some units in an ELSS fund within the ETMONEY app, we will display the number of units and the amount that is redeemable from your ELSS fund at that point in time.
Returns Of ELSS Funds
An ELSS is a Mutual Fund, and like all Mutual Funds, returns are not guaranteed in these funds as well. Nevertheless, an examination of the top schemes shows that the category has done extremely well over many years if you stay invested through the ups and downs in the market.
Performance Of ELSS Funds
|Scheme||3 Years||5 Years||10 Years*||20 Years*|
|Aditya Birla Sun Life Tax Relief 96||10.1%||13.1%||13.8%||18.7%|
|Axis Long Term Equity Fund||15.9%||17.1%||18.0%||—|
|DSP Tax Saver Fund||19.9%||17.5%||16.2%||—|
|Franklin India Tax Shield Fund||13.8%||12.7%||14.0%||19.9%|
|HDFC Tax Saver Fund||10.5%||11.4%||10.8%||20.6%|
|ICICI Prudential Long Term Equity Fund (Tax Saving)||15.1%||14.1%||14.0%||22.0%|
|L&T Tax Advantage Fund||11.3%||13.5%||12.9%||—|
|Mirae Asset Tax Saver Fund||22.6%||22.3%||—||—|
|Nippon India Tax Saver (ELSS) Fund||9.6%||8.7%||12.3%||—|
|SBI Long Term Equity Fund||15.9%||12.8%||13.1%||21.5%|
|MEDIAN RETURNS OF ELSS FUNDS||14.4%||13.3%||13.8%||20.6%|
|* Regular Plan (As Direct Plan Started From 2013 Only)|
|TOP 10 SCHEMES SELECTED IN THIS STUDY BASED ON AUM AS OF JUNE 2021|
ELSS Fund Returns vs. Benchmark Index Returns
|Index||3 Years||5 Years||10 Years*||20 Years*|
|ELSS Fund Median Returns||14.40%||13.30%||13.80%||20.60%|
|NIFTY 50 TRI||13.90%||14.30%||12.20%||16.00%|
|NIFTY 200 TRI||14.10%||14.60%||12.70%||—|
|NIFTY 500 TRI||14.70%||14.90%||12.90%||17.80%|
|* Regular Plan (As Direct Plan Started From 2013 Only)|
|ELSS Returns represent median returns of TOP 10 ELSS funds selected based on AUM as of JUN 2021|
As the table shows, when we benchmarked the ELSS fund performances with their typical benchmarks, we found that these funds have been handsomely beating the indices over a long period. However, in the more recent years i.e., the last 2-3 years, some funds are outperforming the indices by a good margin, while others struggling to catch up.
To dig deeper, we looked at SIP returns of ELSS funds because many ELSS investors invest via the SIP route. So, we checked how a monthly SIP of Rs. 1,000 would have added up over different periods of time.
SIP Performance (Rs. 1,000 Per Month)
|3 Years||5 Years||10 Years||20 Years|
|Aditya Birla Sun Life Tax Relief 96 Fund||46,246||81,990||261,059||—|
|Axis Long Term Equity Fund||51,824||96,128||321,717||—|
|DSP Tax Saver Fund||55,298||98,593||313,156||—|
|Franklin India Tax Shield Fund||51,143||88,471||258,728||1,852,359|
|HDFC Tax Saver Fund||48,116||81,459||226,382||1,773,171|
|ICICI Prudential Long Term Equity Fund (Tax Saving) Fund||51,043||90,670||268,938||2,169,076|
|L&T Tax Advantage Fund||49,740||86,182||254,539||—|
|Mirae Asset Tax Saver Fund||55,742||104,070||—||—|
|Nippon India Tax Saver (ELSS) Fund||48,605||78,239||226,984||—|
|SBI Long Term Equity Fund||51,713||89,550||252,339||1,158,543|
|MEDIAN PORTFOLIO VALUE||51,093||89,011||258,728||1,812,765|
|MEDIAN ELSS CATEGORY RETURNS (%)||26.4%||17.4%||14.9%||17.6%|
|ALL DATA IS FOR REGULAR PLANS|
|TOP 10 SCHEMES SELECTED IN THIS STUDY BASED ON AUM AS OF JUN 2021|
The more recent performance data, especially the 3 year and the 5 year time frames, have definitely been spruced by the recent stock market rally. A better point-of-reference would be to look at the 10-years and 20-years performance, which also has been pretty good for the ELSS category.
Overall, investing in ELSS funds should be done from a long-term perspective. This not only helps build wealth but also helps investors in riding the volatility that is often associated with market-linked investments.
Choice Of Funds In ELSS Category
There are no index funds in the ELSS category. This means all funds are actively managed and would, therefore, have their own peculiarities. For instance, in terms of the investing style, some funds can be growth-oriented, some can be value-oriented, and some ELSS funds can be a blend of both growth and value.
Similarly, ELSS funds may have different investment strategies in terms of the proportion of equity and debt they hold and the level of diversification they provide. The market capitalization bias can be another crucial factor, with some funds focusing on large caps, while other funds allocating higher corpus to the mid-cap and small-cap space.
To put this market capitalization point in numbers, the ELSS category has only 33% of its assets in mid and small caps at this point. This is in line with how it is at most times, i.e., between 20% and 35%.
But some funds have increased their allocation to mid and small caps. Such allocation has helped these funds deliver superior performance, thanks to the recent rallies in small-cap and mid-cap space.
Top-Performing ELSS Funds (Last 1 Year)
|1 Year Returns||Holding In Large Cap||Holding In Mid Cap||Holding In Small Cap|
|Quant Tax Fund – Direct Plan||113.9%||48.6%||22.2%||29.2%|
|IDFC Tax Advantage – Direct Plan||77.2%||55.2%||24.5%||20.3%|
|BOI AXA Tax Advantage – Direct Plan||70.1%||43.4%||46.4%||10.2%|
As an investor, you have to recognize these investment strategies of different ELSS funds before investing. This would give you a fair idea about the impact these strategies might have on the fund’s volatility and risk levels.
If this is starting to sound a bit confusing, then do access the ETMONEY app where in addition to telling you the scheme’s proportion of large-cap, mid-cap, and small-cap stocks, we also give you a Report Card for every fund which will make your selection process very scientific and a lot easier.
Taxation Of ELSS Fund Returns
Funds in the ELSS category have to be held for at least 3 years. Therefore, any profits made on the sale of those units will be deemed as LTCG or long-term capital gains. Long-term capital gains attract a tax of 10% which is over and above an aggregate limit of Rs. 1 lakh.
When compared to other tax-saving financial products, the ELSS is somewhere in the middle. At one end, there are tax-saving fixed deposits where the interest earned is taxable as per your income tax slab. This means you may have to pay as high as 30% tax on your gains. And at the other end is an instrument like PPF, which in spite of a 15-year lock-in offers a tax-free interest rate.
In this context, an ELSS at just 10% tax on capital gains exceeding Rs. 1 lakh is still a very good deal.
Loan Against Investment In ELSS Funds
In spite of having the lowest lock-in period amongst all tax-saving instruments, many investors squabble over it and seek answers to how one can break this 36-month holding period. Well, the answer is simple. You cannot. There is no way you can withdraw from an ELSS fund before 3 years.
However, if you need some money urgently, then you do have the option of taking a loan against your ELSS fund. It is not an option many people explore. The reason for that is the lack of knowledge on how it works and how beneficial it can be when you need some immediate money.
Many banks and NBFCs offer this facility of loan against your ELSS investments. The loan amount is usually equivalent to 50% to 60% of the investment value, and the loan itself comes at very low-interest rates of 9 to 10%.
If you want to understand the nuances of this loan facility, then you can read our blog Loan Against Mutual Funds, where we have detailed the eligibility, process, interest rates, and other essential information that you would need to know when considering taking a loan.
How To Invest In Best ELSS Funds
Investing in an ELSS fund is super easy. And it is even easier when you do it through the ETMONEY app, which has over two dozen funds in the ELSS category for your consideration. All you need to do is download the mobile application, install it, complete your KYC which is 100% digital and super fast, tap on the ELSS category and choose the scheme you like.
ETMONEY allows you to invest in the lumpsum mode and in the SIP mode. And you can also choose amongst many banks and payment methods. More importantly, the ETMONEY app helps you track your fund and portfolio performance on an everyday basis. It also gives you a report card for every scheme which helps you make the right decisions on which funds to buy and which funds to sell.
It is often seen that most investors apply for ELSS funds in the January to March period, which is popularly labeled as the tax-saving season. That is certainly not the right way to go about it and the more prudent approach is to invest little by little on a monthly basis using the SIP route. This approach not only disciplines your investing but also helps in averaging your purchase which is one of the secrets to long-term wealth building.
To Sum Up
ELSS is a 2-in-1 investment product. It does not just help you reduce your tax outgo, it helps you create considerable wealth with that money. So you can use these funds to achieve your long-term goals like child education and retirement, where you need to beat inflation by a considerable margin.