Equity Linked Savings Schemes (ELSS) are a type of mutual fund that helps investors save tax under Section 80C of the Income Tax Act, 1961. Investments of up to Rs 1.5 lakh in ELSS qualify for tax deductions. Additionally, ELSS funds have the shortest lock-in period of 3 years compared to other Section 80C options. This makes ELSS one of the best tax-saving investment options for many investors.
What is ELSS?
ELSS, or Equity Linked Savings Scheme, is an equity mutual fund with two key features:
- It comes with a 3-year lock-in period.
- It offers tax benefits under Section 80C.
ELSS MF predominantly invests in equities and equity-related instruments like shares. As per regulations, at least 80% of the corpus is invested in equities, while the remaining 20% may be invested into debt and money market instruments.
The lock-in period for ELSS funds is the shortest compared to other Section 80C tax-saving instruments like PPF, NSC, etc., which have longer maturity periods.
The overall purpose of ELSS funds is to encourage long-term retail participation in equity markets. At the same time, helps investors save tax through investments in equity.
Who Should Invest in ELSS?
- Investors looking for tax deductions under Section 80C up to ₹1.5 lakhs should consider investing in ELSS mutual funds.
- Equity investors who want to save tax on short-term capital gains can route their investments through ELSS.
- Retail investors willing to stay invested for the long term and benefit from stock market growth.
- Individuals in the higher tax brackets who wish to reduce their taxable income.
- Salaried employees and self-employed can consider investing their yearly bonus or surplus income in ELSS to lower tax liability.
However, investors should assess their risk appetite before investing since ELSS schemes are subject to equity market risks being diversified equity funds.
How to Select the Right ELSS Fund?
Selection of the ELSS fund is crucial to maximise your long-term wealth creation goals. Here are some parameters that should be evaluated:
Long-Term Performance
Analyse the scheme’s performance across market cycles, especially during market downturns. Choose an ELSS fund with a consistent long-term track record across bull and bear runs.
Fund Manager Experience
An experienced fund manager with proven equity research and portfolio management expertise is vital for wealth generation. So, choose funds managed by seasoned fund managers.
Risk-Return Profile
Assess the fund’s historical risk-adjusted return ratios like Sharpe and Treynor ratios. Higher ratios indicate better returns achieved vis-a-vis the quantum of risk taken.
Costs and Loads
Check the expense ratio, which covers the annual fund management fees and other operating expenses. Also, ascertain the exit load levied when redeeming units before the 3-year lock-in period is completed.
Portfolio Composition
Evaluate the concentration toward top sectors and underlying stocks. Diversification across sectors/companies may reduce concentration risks in a portfolio.
Bandhan ELSS Tax Saver Fund
Bandhan ELSS Tax Saver Fund is an Equity Linked Savings Scheme (ELSS) that aims to generate long-term capital growth from a diversified equity portfolio. This fund enables investors to avail of a deduction from total income, as permitted under the Income Tax Act, 1961.
The Bandhan ELSS Tax Saver Fund allocates 95.89 % of its funds to equity instruments. Out of the total fund corpus, 94.72% of its corpus to equities (as on 31st Janaury 2024). Of this, 63.46% is allocated towards large-cap stocks, while 14.84% goes into mid-caps and 16.42% in small caps (as of February 2024). 5.28% of the corpus is allocated to cash (as on 31st January 2024).
This fund has delivered a 21.05% return in the last 3 years (as of February 2024). Currently, its NAV is Rs 135.9300 (as of 29th February 2024). The fund’s AUM is Rs 5,073 crore.
Conclusion
Investing in ELSS mutual funds is a smart way to save taxes u/s 80C and grow one’s wealth over the long run. Review asset allocation, past returns, the fund management team’s expertise, and other metrics before selecting the right ELSS fund for your portfolio. Investing through SIP mode can further optimise overall returns.
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