What are the advantages and disadvantages of investing in ELSS Mutual Funds-| North Loop Official Blog
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26 Oct 2020

What are the advantages and disadvantages of investing in ELSS Mutual Funds-

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Mutual funds are those investments that help cater to both, aggressive investors seeking short-term returns as well as a laid back set of investors seeking returns over a long period of time.

Investing one’s money is important as it can help achieve an individual’s financial goals, be it buying a car or funding your child’s education. And mutual funds are one of the sought after investment modes to receive return on investments.

What is ELSS funds?

Mutual Funds are primarily categorized into 3 types of funds-

  • Equity Schemes
  • Debt Schemes
  • Hybrid Schemes

ELSS funds fall under the category of Equity Schemes. So, what is ELSS funds?ELSS or Equity Linked Savings Scheme is a type of equity scheme wherein fund managers primarily invest an investor’s funds into equity and equity-linked instruments over the course of a lock-in period of three years. These funds are long term funds with a tax advantage, allowing users to save tax of up to Rs.1.5 Lakh under Section 80C of the Income Tax Act.

However, like any other market-linked investment instruments, ELSS Funds have their own set of advantages and disadvantages, as discussed below-

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Advantages of investing in ELSS Funds-

  • Tax Advantage- Investments made in ELSS funds help investors avail tax benefits of up to Rs. 1.5 Lakhs under Section 80C of the Income Tax Act, 1961. Moreover, returns received from ELSS funds will be treated as long-term capital gains, taxed at 10% above Rs. 1 Lakh which is relatively lower than short-term Capital Gains.

  • One of the lowest lock-in periods across all other alternatives- Shedding light on other tax-saving schemes such as Public Provident Fund (PPF), National Pension Scheme (NPS), etc, the 3-year lock-in period of ELSS funds are relatively lower than other alternatives. PPFs have a 15 year lock-in period whereas NPS has a lock-in period that extends till an individual’s retirement.

  • Higher Returns with the benefit of diversification- In comparison to other schemes like PPFs and NPS, ELSS Funds offer significantly higher returns as they are market-linked and the diversification across small, medium, and large-cap stocks helps maximize returns as well as spread risks.
  • Benefit of compounding interest- Investments in ELSS funds benefit investors in the long run from the power of compounding interest. The lock-in period ensures that the interest gets compounded, significantly increasing the yield over the long run.

  • Benefit of 2 modes of investment in ELSS Funds- An investor can invest their money in ELSS funds, either making a one-shot lumpsum payment or at regular intervals through Systematic Investment Plans (SIPs).

Disadvantages of ELSS Funds-

  • Higher risk- investments made in ELSS funds are riskier than other investment tools such as NPS and PPFs as they are market-linked. Hence, the market volatility based returns impact the overall performance of the mutual fund.

  • No option for premature withdrawal- Due to the presence of a fixed 3 year lock-in period, premature withdrawals are completely restricted, making these funds illiquid until the end of the tenure.

  • The availability of various ELSS options may create a lot of confusion for investors, leaving them spoilt for choice.

Top 5 ELSS Funds-

The top 5 ELSS funds for 2020 (as of October) are given below-

Best performing ELSS Funds (2020)
NameAUM Size1 Year Returns3 Year Returns5 Year Returns
Mirae Asset Tax Saver FundRs. 4720 crores14.85%8.86%NA
Quant Tax PlanRs. 17 crores33.17%9.81%16.11%
Canara Robeco Equity Tax Saver FundRs. 1181 crores17.37%10.8%11.5%
Axis Long Term Equity FundRs. 21,836 crores -0.77%7.96%10.22%
Invesco India Tax PlanRs. 1,134 crores5.17%7.28%10.56%

The above list of best performing ELSS funds just draws a picture of the returns over the past couple of years and we request our readers to undertake proper research under each fund before making an investment.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.