ELSS or Equity Linked Savings Scheme is a mutual fund scheme that primarily invests in equities and comes with several benefits. Popularly known as tax saving mutual funds, it allows one not to just create wealth, but also save money in taxes under section 80C of the Income tax. One can avail tax rebate of up to Rs 1.50 lakh under this scheme, which comes with mandatory lock-in period of three years. A taxpayer can avail tax benefits for the said amount every year. One can invest in this saving instrument in lumpsum or in SIP (Systematic Investment Plan) mode.  

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"To choose the right tax-saving product, you can look at four filters or lenses – such as the return potential of the product, lock-in period, tax incidence, and compatibility with long term financial goals. When looking at the return potential, investors should look at the real rate of return after the impact of inflation. With an ELSS, though the return is not guaranteed, it has the potential to generate a higher real rate of return than other instruments u/s 80C over the long term. Regarding capital gains tax, ELSS is taxable at 10% p.a. for a holding period exceeding 1 year and for capital gains exceeding Rs.100,000. Also, in terms of the lock-in period, an ELSS stands out due to its minimum lock-in period of 3 years,” says Sorbh Gupta, Fund Manager, Equity, Quantum Mutual Fund.

Speaking of how it helps you save money in taxes,  Sorbh says suppose an investor in the highest tax bracket decides to invest Rs. 1,50,000, he would have a tax benefit of Rs.45,000 upfront (assuming the maximum marginal tax rate of 30%). 

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The lock-in period is one of the most exciting features of the ELSS as it comes with a mandatory lock-in period of just 3 years as against traditional saving instruments such as FD (5 years) and PPF (15 years). It has to be understood that as ELSS invests mostly in stocks, it comes under high risk, high return category of a saving scheme, while the latter two offers low or negligible risk. It is also important to stay invested in ELSS for long-term to maximise your gains, says Gupta.

“Investors are to note that since ELSS is an equity mutual fund, the longer you stay invested, the better the chances for risk-adjusted returns and compounding of returns. If you were to look at the rolling return of the benchmark Sensex for any period 7 years, your portfolio would have not suffered a loss,” he says.

Things to keep in mind before finalising an ELSS scheme?  

When looking at an ELSS scheme, due to the lock-in period of 3 years, it qualifies for a long-term investment. Thus, it becomes important that investors need to look at certain parameters before finalizing a scheme, such as the stability of the fund management and consistency across investment styles.  

However, investors are to note that since ELSS is an equity mutual fund, the longer you stay invested, the better the chances for risk-adjusted returns and compounding of returns, says Sorbh. 

"Investors should consider mutual funds with a long-term track record. One can look at a churn ratio that is less than 30%. A low churn ratio indicates a long-term holding approach by the fund manager. Also, investors can look at a well-diversified portfolio consisting of quality stocks that can be easily liquidated. A Fund manager facing redemption pressure in a down market is most likely to first exit from the liquid stocks,” he says.   

Lumpsum or SIP—how should you go about buying ELSS?  

It depends on timing and sentiments of the market.  "If the tax-saving window of Rs.1.5 Lakh is open, investors can look at investing a lumpsum investment in ELSS taking the opportunity of the equity market correction due to external shocks and geopolitical risks. If planning ahead for the new financial year, investors can use an SIP (Systematic Investment Plan) mode of investment to avail the benefits of rupee cost averaging and compounding and help cope with the increased volatility. ," he adds.  

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)