Financial experts consider mutual funds investments as an effective way of wealth generation. To invest in a mutual fund, one must choose between its various schemes, and ELSS is one of them.

There are several vital aspects of an ELSS mutual fund scheme. So, scroll through to gain an insight into what is ELSS mutual fund, and its other nitty-gritty.

Equity Linked Savings Scheme or ELSS is a diversified equity mutual fund scheme that invests a majority of its corpus into equity or equity-related instruments. In addition, it is the only mutual fund scheme that offers tax benefits to its investors.

Illustrated below are the various features of ELSS funds:

• Lowest Lock-In Among Tax-Saving Investments: ELSS is an open-ended scheme that is characterised by a 3-year lock-in period. This implies that investors cannot redeem or sell their mutual fund units for 3 years. Moreover, redeeming their funds prematurely can attract an additional fee.
• Diversified Investments: A key aspect of ELSS mutual funds is diversification. An ELSS builds its portfolio with investments in various stocks across different sectors and market capitalisations.
• Tax Benefit: This type of equity mutual fund allows investors to claim tax deductions under section 80C of the Income Tax Act, 1961.

Illustrated below are the steps for how to invest in ELSS:

• Step 1: Determine Your Tax Slab and Taxable Income

It is imperative that investors are aware of the tax slab applicable to their income. Moreover, they must calculate their taxable income. Based on these factors, one can choose an ELSS mutual fund that fulfils their specific requirements.

• Step 2: Choose an Appropriate ELSS

In order to choose an ELSS suitable for you, evaluate the following points:

Past Performance of a Fund - It is of utmost importance that investors check a fund’s past performance before investing. That said, one must note that past performance is not an indicator of future returns. Instead, it only gives one a fundamental idea of probable returns.

Experience of the Fund Manager - Another critical point to evaluate before investing is the experience of a fund manager. It indicates how a fund manager generated returns by navigating the fund through market fluctuations over the years.

Risk Appetite - Like any other mutual fund, investment in ELSS involves risk. Therefore, potential investors must ascertain their risk appetite and the ability to digest losses, if any.

Investment Horizon - It is wise to not view mutual fund investments from a short-term perspective. Rather, one should keep his/her investment horizon longer and be patient to earn significant returns.

Moreover, one should be prepared to stay invested in a SIP for a minimum of 6 to 8 years. According to financial experts, this is the timeframe within which investors will recover any short-term equity losses.

• Step 3: Deciding Between Lumpsum and SIP

Mutual fund investors are often in a dilemma when it comes to choosing between lumpsum and SIP. However, for an ELSS fund investment, an SIP is often preferred as it helps one average the buying cost per unit. Besides, a lumpsum equity investment can be risky when the market is high.

Given below are the ELSS benefits:

1. It Ensures Disciplined Investing

Equity market investments are prone to market volatility. Hence, after investing in equity mutual funds, one must be patient and keep a long-term investment horizon. As a result, he/she need not fret about the daily market fluctuations, which also inculcates disciplined investing.

2. Mandatory Lock-in Period Enables Growth

The compulsory 3-year lock-in period of ELSS mutual funds provides these investments with a growth opportunity, which is necessary for equity-oriented schemes.

3. ELSS Mutual Fund Tax Benefit

When investing in this mutual fund, investors are eligible to claim a deduction of up to ₹1.5 lakhs per in a financial year under section 80C of the Income Tax Act, 1961.

Furthermore, gains earned on the sale of ELSS investments are taxable in the following manner:

• Short Term Capital Gains (STCG): This does not apply to ELSS mutual funds as investors cannot redeem their mutual fund units before a holding period of 3 years.
• Long Term Capital Gains (LTCG):  ELSS tax exemptions are applicable for up to ₹1 lakh per year in the case of long term capital gains. LTCG more than ₹1 lakh are taxed at a 10% rate plus surcharge and cess.

4. ELSS Has No Upper Limit

Most investors are unaware that ELSS has no upper limit. This implies that you may invest as much amount you want or as much as your risk appetite allows.

Listed below are the things to consider while investing in an ELSS mutual fund:

• Tax Benefits of Equity Investing: ELSS funds are the only equity schemes extending tax benefits. Therefore, several investors consider these solely for enjoying ELSS tax benefits.

However, if tax-saving is the only objective, investors can look to other investment options available under Section 80C. ELSS funds invest in equities, which involves risks. So, investors must ensure that they are financially capable of digesting losses, if such a circumstance arises.

• Mode of Investing: Investors can choose to invest regularly to meet their long-term goals instead of focusing only on the tax benefits of ELSS mutual funds. One can invest through a SIP to navigate the inherent market volatility and enable rupee cost averaging.