Mutual Funds

What are the advantages and disadvantages of investing in ELSS mutual funds?

Investing in ELSS Mutual Fund

Being a citizen of the country, taxes are unavoidable expenses. We dedicate a part of our hard-earned money to the development of economy.

But every so often, we wish to escape from any such tax deduction so that we could make some savings for future use. 

People have financial goals and work hard to secure their future. That is why saving is an important aspect for so many of us. 



But it becomes a subject of just wonders because we get little money to spare from our income after the normal expenses from daily life.

So, how about another option that lets you generate wealth and save tax as well?

If you wonder whether it is possible to retain income tax at all? The answer is yes! 

According to the parameters of a section 80C of Income Tax Act, there are multiple tax saving investment options present for the people of India.

Tax saving investment is a vehicle that lets you make investment in securities from a part of your income tax.

The government has introduced ELSS, PPF, NPS and more such instruments to help people save tax and invest for their future.

Among all these instruments of tax saving investment, ELSS is considered the best choice for a person to opt for.



Also Read: 10 Things You Need to Know About Credit Cards

What is ELSS?

ELSS is Equity Linked Saving Scheme that lets people invest in equity mutual funds. 

This is a tax saving fund because it lets people make investments through exemption from tax. 

A person can receive an exemption of around 1.5 lakh from the annual taxable amount.

This amount is transferred in ELSS fund. Thereafter, the investor can choose to add more amount to this. The greater the amount is the higher return rate gets.

This is a low-risk investment option with high returns  up to 13-14%  annually. 

This is also considered as the best investing plan for first time investors.

How to invest in ELSS?

It is easy to start investing with ELSS. You can invest in it as you do in any Mutual Fund.

You can contact an Online Investment Service Account to step into the field.

ELSS can be invested using the SIP method or can also be funded in lump sump amount. The maturity period for the SIP amount will vary for each term of investment.

It has a lock in a period of 3 years that makes it even more efficient investing option than the other tax saving investment options. 

If you are planning to invest in a lump sump amount, you should know that it would be a risky venture. But, this will incur greater returns and will benefit you eventually than the SIP method.



You should have good knowledge of share market to invest in lump sump amount.

SIP on the other hand is a disciplined and less risky plan of investment. 

You can decide to receive dividend payouts or growth income as per your will.

Advantages of ELSS

Tax saving: 

Investing in ELSS enable you to save tax up to 1 lakh. A person can claim a tax rebate of up to 1.5 lakh. 

Lock in period: 

FD has 5 years of lock in period and PPF have 15 years of lock in period.  ELSS have the shortest lock in period of 3 years among the tax saving investments.

Return: 

A person can receive an average of 13-14% annual return on ELSS. On the other hand, FD and PPF gives only 7% of return on investment.

Disadvantages off ELSS

Risk: 

ELSS carries moderate risk since it invests in equities. However, the risk is diversified. This is because the fund manager does not invest all the units in just one company but distributes it in different stocks. 

Liquidity: 

You cannot withdraw or sell your fund units before the maturity. ELSS are not liquid until the lock in period. 

Taxable: 



If the investor holds more than 1 lakh of return in a financial year, then she/he is charged 10% of capital gain tax on the total amount. 

The Bottom Line

People have some financial goals set for the future, but occasionally, they are incapable of attaining such goals. Tax saving investments are a potent choice for such investors. 

Among all the tax saving investments, ELSS is the most able option to choose for. It has high returns and allows tax exemption of 1.5 lakh.

However, ELSS is moderately risky. So, if you have no risk tolerance, this might not be the best option for you.

Analyse the pros and cons of the investing instrument and make a choice that will suit your finances the best. 

Further Reading:

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