ELSS Mutual Funds: The Best Option for Your Portfolio

While saving is important so is the need to have a tax plan. Though it requires proper planning, investing in ELSS Mutual Funds will be a smart choice.

Equity Linked Savings Scheme (ELSS) mutual funds are increasingly becoming a favoured investment choice for those aiming to save on taxes while simultaneously growing their wealth over time.

Stay till the end to grab the latest top 5 ELSS Funds to invest in 2024.

Here’s a comprehensive look at why ELSS funds stand out as an excellent option for your investment portfolio:

What are the Benefits of Taxation on ELSS Mutual Funds?

One of the primary attractions of ELSS funds is the tax deduction they offer under Section 80C of the Income Tax Act. Investors can claim deductions up to ₹1.5 lakh per financial year, reducing their taxable income. This feature makes ELSS an appealing option for individuals looking to maximize their tax savings while investing in the equity market.

How do ELSS Mutual Funds Have the Potential for High Returns?

ELSS funds have the potential to deliver higher returns compared to other tax-saving instruments like the Public Provident Fund (PPF) and National Savings Certificate (NSC). Over the long term, these funds can capitalize on the growth potential of the equity markets. Historically, ELSS funds have delivered an average annual return of around 21.05% over the past five years, significantly outperforming many traditional saving schemes. 

What are Some Flexible Investment Options for ELSS Mutual Funds?

ELSS funds offer significant flexibility regarding how one can invest. Investors can select between having Systematic Investment Plans (SIPs) and lump-sum investments for their portfolio.

SIPs allow for regular, fixed-amount investments, making it easier to invest consistently without straining finances. Lump-sum investments, on the other hand, allow for a one-time investment, which can be advantageous when you have a considerable amount of money to invest at once.

How the ELSS Mutual Funds Diversify their Assets?

These funds invest in a diverse range of equities from different industries and market capitalizations. This diversification helps mitigate risk by spreading investments across different segments of the economy, thereby reducing the impact of a downturn in any single sector. This exposure to a broad spectrum of industries and companies can enhance the growth potential of the investment.

What is the Lock-in Period for ELSS Mutual Funds?

·        The lock-in period for ELSS Mutual Funds is the lowest of any tax-saving option under Section 80C, at only three years.

·        This feature makes them more accessible and liquid compared to options like PPF, which has a lock-in period of 15 years.

·        After three years, investors have the flexibility to redeem their investments or stay invested to continue benefiting from market growth.

Are ELSS Mutual Funds Suitable for Long-term Goals?

·        ELSS funds are particularly well-suited for long-term financial goals, such as retirement planning, children’s education, or buying a home.

·        While the equity market can be volatile in the short term, the long-term growth potential of equities can provide inflation-beating returns.

·        Investors with a horizon of at least five years can harness the power of compounding to grow their wealth substantially over time.

What does the Management of ELSS Mutual Funds look like?

ELSS funds are managed by professional fund managers who leverage their expertise to select quality stocks and construct a well-balanced portfolio. Their ability to adapt to market conditions and make informed investment decisions can significantly enhance the fund’s performance.

What are the Risks and Considerations to Learn about ELSS Funds?

As with any equity investment, ELSS funds carry market risk and are subject to volatility. The value of investments can fluctuate based on market conditions. Therefore, investors must have a long-term perspective and be prepared for short-term market fluctuations. Consulting with a financial advisor can help tailor an investment strategy that aligns with individual risk tolerance and financial goals.

Top 5 ELSS Mutual Funds to Invest in 2024

Parag Parikh ELSS Tax Saver Fund

The Parag Parikh ELSS Tax Saver Fund is an open-ended equity-linked savings scheme that offers tax benefits under Section 80C of the Income Tax Act. It has a compulsory lock-in period of three years. This fund aims to invest at least 80% of its corpus in Indian equities, mirroring the investment philosophy of the Parag Parikh Flexi Cap Fund. It focuses on long-term value investing and has delivered an impressive average return of 22.45% over the past three years. However, it has a relatively high expense ratio of 0.61%, which might be a consideration for cost-sensitive investors.

Quant Tax Saver Fund

The Quant Tax Saver Fund is another open-ended ELSS with a 3-year lock-in period. This fund primarily invests in equity and equity-related instruments and follows a multi-cap investment strategy, allocating assets across large, mid, and small-cap stocks. Its goal is to achieve long-term capital appreciation. Although it has shown strong performance in recent years, the fund has a shorter track record compared to some of its peers, which might be a consideration for investors looking for long-term stability.

Kotak Tax Saver Fund

The Kotak Tax Saver Fund is one of the largest ELSS funds in the market, boasting an Asset Under Management (AUM) of over ₹10,000 crores. This open-ended scheme also comes with a 3-year lock-in period and invests at least 80% of its corpus in equity and equity-related instruments. It employs a multi-cap investment approach to achieve long-term capital appreciation. The fund has delivered consistent returns over the long term, making it a reliable choice for many investors.

DSP ELSS Tax Saver Fund

Launched in 1997, the DSP ELSS Tax Saver Fund is one of the oldest equity-linked savings schemes available. This open-ended fund requires a 3-year lock-in period and allocates at least 80% of its assets to equity and equity-related instruments. It adopts a multi-cap investment strategy to seek long-term capital appreciation. Over the years, the fund has delivered strong and consistent returns, earning a reputation for stability and reliability.

Bandhan ELSS Tax Saver Fund

The Bandhan ELSS Tax Saver Fund is relatively new, having been launched in 2021. Like its peers, it is an open-ended scheme with a 3-year lock-in period and aims to invest at least 80% of its corpus in equity and equity-related instruments. It also follows a multi-cap investment approach to target long-term capital appreciation. Despite its short track record, the fund has shown promising returns so far, which could appeal to investors willing to take a calculated risk on a newer entrant.

All these ELSS Mutual Funds offer tax benefits under Section 80C and aim to generate long-term capital appreciation through investments in equities. They differ in their investment strategies, track records, and expense ratios:

Parag Parikh ELSS Tax Saver Fund: Strong 3-year returns, high expense ratio, follows Parag Parikh Flexi Cap Fund strategy.

Quant Tax Saver Fund: Multi-cap approach, strong recent returns but short track record.

Kotak Tax Saver Fund: Large AUM, consistent long-term returns, multi-cap strategy.

DSP ELSS Tax Saver Fund: One of the oldest, strong long-term performance, multi-cap approach.

Bandhan ELSS Tax Saver Fund: This newer fund, has promising returns so far, a multi-cap strategy.

When choosing an ELSS fund, investors should consider their risk profile, investment horizon, and financial goals to determine the best fit for their portfolio.

Conclusion

ELSS Funds offer a unique blend of tax benefits, potential for high returns, flexibility, and professional management, making them an ideal choice for investors looking to build wealth over the long term. Investment made through a SIP plan is the best way to boost your portfolio. Their diversified approach and relatively short lock-in period add to their attractiveness. However, it is essential to understand the associated risks and have a clear investment horizon to fully capitalize on the benefits of ELSS funds. Consulting a financial advisor can provide personalized guidance to optimize your investment strategy and achieve your financial objectives.