Tax-Saving Investments: Can ELSS Funds Maximize Your Returns?

It is important to maintain a good balance between investments that offer high returns and while saving tax. Equity Linked Savings Scheme (ELSS) funds are one such category of equity funds that offer you the dual benefits of high returns and tax savings. Read further to find out more about these ELSS mutual funds!

What Are ELSS Funds?

ELSS funds are equity-based schemes where the major portion (about 80%) of the corpus is invested in equity-based schemes, and these funds offer a tax exemption of up to Rs. 150,000 rupees under Section 80C of the Income Tax Act. 

These funds have a lock-in period of three years, which is the lowest among the tax-saving instruments.

When you invest in ELSS funds, your corpus is spread across various large, medium, and small-cap companies. 

Do ELSS funds Increase Wealth?

When you buy mutual funds such as ELSS funds, you might have different goals like wealth preservation or creation. So where do these ELSS funds fit, and do they help maximize returns?

The answer is yes because ELSS funds have a lock-in period and are great investment options for the long term while allowing you to save tax. Since you get tax exemptions under these schemes, your net returns after taxation are higher than other equity-based funds. 

Below is a table that compares various tax-saving funds and their respective returns as of 2024. 

From the table, it can be inferred that ELSS funds offer one of the highest returns while their lock-in period is lower compared to the other funds. This is because ELSS funds are managed by dedicated portfolio managers who regularly optimize the portfolio compositions to adjust the risk and returns. 

In addition, the reinvestment of your corpus also helps you experience the power of compounding, which helps accelerate wealth creation!

However, it is important to note that, unlike most tax-saving instruments whose returns are regularly adjusted by the government, ELSS funds are subject to market risks. 

This is why, to maximize the returns on your investments, ensure that you carefully analyze the historical trends and returns, study the composition of the ELSS funds, and analyze the manager’s track record before you decide to invest in these funds.

Most importantly, carefully set your financial goals and ensure that these ELSS funds meet them to optimize your returns! 

Conclusion

As long as you carefully evaluate the available ELSS funds options, you can ensure that the returns you obtain are maximized. 

In addition, ELSS funds offer much more liquidity than other tax-saving instruments, making them one of the best investment options suitable for medium-term goals. Hopefully, this blog helped you gain a deeper understanding of ELSS funds and how you can benefit from them! To start investing in mutual funds, consider Dhan.