Best ELSS Mutual Funds

Tax saving mutual funds are ELSS funds ELSS stands for Equity Linked Savings Scheme. The government makes policies to achieve goals they think are necessary for the country’s good as a whole.

ELSS mutual funds come with a 3 year lock-in period. This lock-in period is also a part of the government’s plan to help investors gain in the long term. Most investors often panic when the markets fall. At such times, they end up selling their investments at alower price than at which they had originally bought.

Equity Linked Savings Scheme funds are also known as tax savings mutual funds. They are the most popular in the equity funds category due to the tax benefits provided by them under section 80C of the Income Tax Act. Investor can save up to a amount of 1.5 lakhs by investing in these funds. But these funds have a lock-in period of 3 years. Investors cannot redeem their money before the maturity date. Most of the mutual funds in India generally don’t have a lock-in period but ELSS funds are exception in this aspect.

No other equity mutual funds qualify for the tax exemption under section 80C of the act. However, equity can offer other tax benefits to the investor. For example, investors can get tax free dividends from the equity funds. If you hold your equity mutual funds for more than a year, the returns will qualify for long term capital gains tax. If you sell your equity funds before a year, 15 % tax is levied on the short term capital gains.

Investors can also invest in these funds through Systematic Investment Plan (SIP) to minimize the market risk. These funds are great way to save tax on your hard earned money.

However, over a longer period of time, investments usually perform well. Thus, to protect investors from their own panic moves, the government has mandated a lock-in period of 3 years. Interestingly, this lock-in period of 3 years is the lowest lock-in period among all other tax saving schemes.

Under Sec 80C of the Income Tax Act of India, you can claim deductions from your taxable income by investing in equity oriented funds.

Among these most popular are the ELSS or commonly known as Equity Linked Savings Scheme, where you can save up to 1.5 lakhs in taxes. However, all the investment have minimum three years lock-in period. A 10% tax is applicable on the gains.

Purpose: As explained above, investing in this category can help you with your tax savings and long term capital growth.

How to Invest in Tax saving Mutual Funds?

In order to apply for Tax saving Mutual Funds, an investor will need to provide his personal details including PAN and Aadhaar number. This is mandatory as per KYC regulations so as to avoid fraud. KYC verification can be done online also. We at Groww can help you become KYC compliant. Once you are KYC complaint, you can use our website, groww.in to invest in any mutual funds – ELSS mutual funds or otherwise. One of the most recommended methods of investments in ELSS is SIP. It allows the investors to average their investments. Moreover, there is no additional taxation on SIP. SIP does not burden the wallet also as it gives the option of investing small amounts rather than investing a lump sum amount.

Why Invest in Tax saving Mutual Funds?

Tax saving Mutual Fund investment is best recommended for those who are in the initial phase of their career. When the earnings are humble, no one likes to take high risks and hence, it is best for beginners. But in much the same way, for people who are earning good but don’t like putting all eggs in one basket, ELSS is good too. This is because ELSS helps them to mitigate their tax by saving money without risk. Thus, there is no specific age where the Tax saving Mutual Fund investment is best. It suits everyone who wants to earn good returns by saving taxes simultaneously.

Who issues Tax saving mutual funds?

Asset management companies (or AMCs or fund houses) create mutual funds. All AMCs will have to be approved by the government body, Securities and Exchange Board of India (SEBI). All mutual funds have to be whetted by SEBI before it is open for the public to invest.

What does investing in Tax saving mutual funds actually mean?

Suppose a mutual fund invests in ten stocks and total current market value of these stocks is 1.1 Crore. Out of this, the AMC deducts say, 0.1 Crore for operating the fund (this is known as the expense ratio). So the net value is 1 crore. Now the AMC will divide this 1 Crore into say, 10,000 parts. These parts are known as units. The cost of one unit is 1Cr/10,000 = Rs. 1000. This is known as the Net Asset Value (NAV) of the mutual fund. Suppose the AMC has set a minimum investment requirement of Rs. 500. Then if you pay Rs. 500, you will get 0.5 units of the fund. Remember that the cost of one unit is the cost when you made the purchase. Suppose after one year, the NAV has fallen to Rs. 700 per unit and you wish to exit the fund (also known as redemption), then you sell your 0.5 units back to the AMC and get 0.5 x Rs. 700 = Rs. 350 back. Yes, you invested Rs. 500 and got back Rs. 350 – a loss of 150 over a year. The point is, that you buy units at current NAV and sell units (fully or partially) at current NAV. This is what investing in mutual fund actually means.

Do Tax saving mutual fund guarantee returns?

Well, sales guys would love to tell you that “over the long term” you will get good returns from mutual funds, but the truth is, there is no guarantee. As the above example shows, you buy at current market value and sell at the current market value. Anything, literally anything can happen in between spectacular returns or spectacular losses. Unless you are mentally ready to accept this and learn how to minimise this risk, do not invest in mutual funds.

How to invest in Tax saving mutual funds on Groww?

One of the best ways to hedge against the small-cap volatility is to adopt a phased approach, also known as Systematic Investment Plan (SIP) approach. We are sure that you must be aware of SIP and its benefits. Buying in small quantity but buying regularly provides you with faster growth. On Groww.in, all transactions to and from AMC is done via BSE. When you decide to invest in a large cap mutual fund of your choice, you choose that mutual fund on the website and click ‘invest’. Following that, you are redirected to the BSE page where you make the payment. BSE then directs your money to the AMC managing your mutual fund. To be assured at your end, you can visit the individual AMC website after the payment. You would be able to see all your purchased units against your folio number.

How long does it take to start investing in Tax saving mutual funds if I do not have a KYC?

It is not possible for any investor to start investing in mutual funds without having completed the KYC process. Under the Prevention of Money Laundering Act (PMLA), Know Your Customer (KYC) norms have been mandated to track the legality of funds used in an investment. KYC is a one-time process which every first-time mutual fund investor needs to follow, to be able to invest in a mutual fund. KYC process on Groww can be completed in 2-3 days. KYC can be completed online with the help of E-KYC or electronic KYC. E-KYC Aadhar (based on OTP) : Investor can use online KYC facility using just the aadhar card number and PAN number, by visiting the website and following the easy process. After entering relevant details like aadhar and PAN number, investor will receive an OTP and KYC will be completed instantly. However, one can invest only up to ₹50,000 per fund house per year under this method.

When is the right time to start investing in Tax saving Mutual Funds?

The answer to this question depends on the following criteria: 1) the rating and performance of mutual fund you are investing into 2) the amount of risk you are willing to take Depending on the above factors let's go ahead: 1) the performance of mutual fund you are investing into makes a lot of difference since a lot of research needs to be done before investing. i) how that particular fund is diversifying its assets since many of funds are sector funds and some others put a lot of money into one sector like banking/finance. ii) But if that particular sector doesn't perform well in the long term you would end up losing your money iii) Some sectors like FMCG (HUL, Dabur) or automobile like Maruti Suzuki(because of innovations it brings in) almost make profits throughout the year and hence it's very advantageous to invest in them for long-term in these sectors. Investment time: more than 3 years. 2) The amount of risk you are willing to take i) It is important since if you want to invest in low-risk funds, debt funds will be the best option(moderate returns, low risk) investment time period: less than 1 or 1.5 years ii) But if you want high returns, more diversification equity mutual funds will be the best since higher the risk, more will be the returns.Investment time: depending on the performance of fund (on an average 4 or greater than 4 years) iii) For a balanced portfolio, you may invest into balanced mutual funds where there is a combination of both equity and debt mutual funds which will again help you to invest for a good duration like less than 2-3 years.