Expert advice

Mar 27, 2014,17.38 IST

How ELSS Mutual funds can grow your money & save tax too

Suresh KP

There are various tax saving investment options where an individual can save tax u/s 80C of Income Tax Act. However, all such investment options come with fixed returns. One of the best ways to grow your money along with saving tax is to invest in Equity Linked Saving Scheme (ELSS) Mutual Funds in India.

What are Equity Linked Saving Scheme (ELSS) Mutual funds?
ELSS mutual funds in simple term are mutual fund schemes that invests 65% in equity related instruments that are notified to avail tax benefits. Investment in such ELSS MFs would provide tax benefit to investors u/s 80C, which is capped to a maximum of Rs 1 Lakh.

How do you benefit from ELSS Mutual funds?
There are various ways you would benefit from ELSS mutual funds.

1) ELSS mutual funds help you to grow money: Since ELSS mutual funds invests in equity related instruments, these schemes would help you to grow your money when the stock market grows over a period of time.

2) Save tax u/s 80C up to Rs 1 Lakh: By investment in ELSS mutual funds, you are eligible for tax exemption up to Rs 1 Lakh u/s 80C. If you have not utilized 80C fully, this is a good opportunity to invest in ELSS funds.

3) Lock-in period of 3 years: ELSS mutual funds come with lock-in period of 3 years. Generally, investors would get tempted to take out the money from any investment option as soon as they get some good returns. They would not wait for long term to enjoy long term benefits. Since ELSS MF’s come with a 3 year lock-in period, you are forced to keep your investment for a minimum of 3 years. This would help you to grow your money that considers market fluctuations.

4) ELSS returns are tax free: If you observe, none of the returns from tax saving investment options other than PPF are tax free. NSC, Tax Saving Bank FD, Tax saving Post office TD scheme etc. all these tax saving option returns are taxable based on individual tax slab. However, interest in Public Provident Fund is tax free, but that comes with a 15 year lock-in period (apart from certain exemptions to withdraw in between). The only tax saving investment option that provides tax free returns for short period is ELSS Mutual funds. Since ELSS mutual funds invest in equity related instruments, these are classified under equity funds. Any returns received from equity funds after 1 year is tax free, hence ELSS funds which comes with a 3 year lock-in period, dividends/returns/capital gains from such funds are also tax free.

How to choose best ELSS mutual funds to invest?
All this is fine, but how to choose best ELSS funds to invest. There are a few parameters which can be considered while choosing good funds.

  • Consider Crisil Rank-1, Rank-2 and Rank-3 ELSS mutual funds
  • Consider top rated funds by Valueresearchonline. You can choose 5 star, 4 star and 3 star rated funds to invest.
  • Consider funds where the Assets Under Management (AUM) is more than Rs 100 Crores. This would indicate that such schemes have gained confidence from investors and they are investing more and more in such schemes.
  • Performance in last 3 to 5 years time frame.

Here are the few top rated ELSS mutual funds which you can review and invest. 










Are there any risks involved in investing in ELSS mutual funds?
Since these funds invest 65% in equity, there is some element of risk. Moderate risk and High risk investors can consider this as a tax saving investment option. Also the past performance may or may not repeat in future. Hence investors should consider this risk element and consider investing in such funds.

The author of this article is founder of He can be reached at for any clarifications.

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