Tax-saving ELSS MFs: Things to keep in mind while investing

With only a few days left for the tax-saving season to end, many taxpayers are exploring their last-minute effort to explore various options to save tax. There is a big basket of products that qualify for deduction under 80 C. Tax-saving Equity-Link Savings scheme (ELSS) Mutual Funds (MFs) is one of the most popular tax-saving funds. It offers the dual benefit of tax savings under Section 80C of Income Tax as well as accumulates wealth over time.

You can claim tax benefit under this section against investments such as Public Provident Fund (PPF), equity-linked savings schemes (ELSS), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC) and Senior Citizens Savings Scheme (SCSS) as well as payments made towards the principal sum of a home loan and life insurance premiums.

What are the ELSS funds?

An ELSS fund is an equity-linked mutual fund, which allocates a minimum of 80% to equity and the rest in debt. The gains on such funds are treated as long-term capital gains (LTCG). Gains above Rs 1 lakh per annum are taxed at 10%.

While selecting the ELSS, many investors may pick the scheme based on recent performance and ignore the long-term performance of the scheme. The ELSS funds are available both in regular and direct plans and come with growth and dividend options as well. Financial Planners suggest that if you are investing on your own, then you should go for the direct option.

Why ELSS funds?

Over the last five years, ELSS funds have delivered an average return of 14-17% against a similar kind of returns from the National Pension System (NPS). Other tax-saving funds like Public Provident Fund (PPF) have offered returns in the 7-8% range. ELSS funds have a lock-in period of 3 years, whereas NPS and PPF have a much longer lock-in period.

Some ELSS funds to consider

Mirae Asset Tax Saver Fund
5-year Compound annual growth rate (CAGR) – 24.16 per cent

BOI AXA Tax Advantage Fund
5-year CAGR -20.04 per cent

Canara Robeco Equity Tax Saver Fund
5-year CAGR -19.55 per cent

DSP Tax Saver Fund
5-year CAGR -18.34 per cent

Axis Long Term Equity Fund
5-year CAGR – 18.26 per cent

According to planners, new investors should not invest in ELSS just because equity gave great returns last year. The investment should be driven by asset allocation.

New investors should keep a few things to keep in mind while investing in ELSS:

-You can invest in ELSS directly from any fund house or through mutual fund distributors.

-Choosing the right ELSS is equally important, hence, it is better to take the help of an expert and not decide on your own.

-Simply looking at the data and star-ratings alone is not enough to pick quality mutual funds

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