ELSS Funds – Best ELSS (Tax Saver) Mutual Funds to invest in 2020

As another financial year is coming to an end, most of you would be busy with tax planning and looking for the most tax-efficient investment avenues. Though there are many tax saving options available for investments, Equity Linked Savings Scheme (ELSS) is one of the best options, as it has the potential to offer higher returns along with tax savings. Under Section 80C of the Income Tax Act, the maximum limit for tax benefit is Rs 1.5 lakh per year so that investors can invest up to Rs. 1.5 lakh in ELSS funds for tax exemption.

ELSS is an open-ended diversified equity fund that invests more than 80% of the corpus in equities, and they come with a mandatory lock-in period of 3 years. Compared to other tax saving investment options, ELSS funds have the shortest lock-in period, and they also have the potential of higher returns as ELSS invest in equities, which can generate higher returns over the long-term. In short, ELSS offers dual benefits of tax exemption and also capital appreciation. Investments in ELSS funds can be done either in lump-sum or by starting a SIP. You can start a SIP with a minimum amount of Rs 500 per month. Even though the tax-exemption is only for Rs 1.5 lakh, there is no maximum limit for investment, which can be made in ELSS.

• Advantages of investing in ELSS, tax-saving mutual funds
• Amongst all the investment options available under Section 80C, ELSS mutual funds have the shortest lock-in period of 3 years

As these funds are invested in equities, they have the potential to generate higher returns as compared to other instruments like PPF, NSC, etc

• There is no upper limit for investment
• Experts professionally manage the funds so investors need not have to worry about gaining expertise of equity markets

Some of the essential points to consider at the time of choosing the best ELSS funds are:

Past performance of the fund

At the time of investing in ELSS mutual funds, it is vital to take into account the past performance of the scheme. However, at the time of seeing the past performance, you should go for schemes that have consistently given higher returns and beaten the benchmark and its peers over the longer-term. So, instead of looking for the performance over 1 or 2 years, choose funds with consistent returns.

Ratings of Fund

It is essential to look at the ratings of the funds, but a 5-star fund may not always be the best fund to invest as ratings change over time depending on any changes in the scheme's portfolio, and it may not provide the desired returns.

Diversification

Equities give the best returns if you stay invested for a longer-term. As ELSS is an equity scheme, you should invest your money in well-diversified schemes that invest their corpus across different industries and sectors for best returns.

The expense ratio of the fund

It is the cost of managing the fund and has a significant impact on the overall returns of the fund. A lower expense ratio translates into a higher return. So, it is essential to choose a fund with a lower expense ratio along with returns.

The time horizon for investment for tax-saving funds

The lock-in period for ELSS mutual funds is three years, which is the shortest as compared to other tax-saving options. However, staying invested in equities for a longer-term fetches the best possible returns. So, even though it has a lock-in period, you can remain invested in them and let your investment grow and if need be, you can withdraw your units partially or fully after three years.

To invest lump-sum or through SIP

ELSS mutual funds give you the flexibility to plan your tax-saving investment either in a lump-sum amount or through SIPs. SIP route is recommended for someone who carries out his tax planning all through the year.

• Top 10 tax-saving mutual funds to invest in 2020
• Here is the list of top 10 ELSS funds which experts at IndiaNivesh recommend for investment in 2020
• Source: Moneycontrol. (Data as on Feb 2020)

ELSS investments are important for your tax planning and also for wealth creation in the long term. Open a Demat account with IndiaNivesh and get our expert advice and guidance for all your investment needs.

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.