Of all the 80C investments, ELSS Funds stand tall, owing to their possibility for higher returns with the shortest lock-in duration of just 3 years. And this isn’t just my opinion, Indians have been increasing their contribution to ELSS funds steadily over the years. 

As you can refer to the chart below. Investments in ELSS funds have increased by nearly 10 times over the past decade. 

Let’s discuss the advantages of ELSS investing and how you can optimise it. 

How do ELSS funds work?

Equity Linked Savings Scheme (ELSS) is like a special type of investment where your money goes into different company stocks chosen by the fund manager. 

These stocks are well diversified across large, mid and small-cap companies of various industries. Moreover, it has a lock-in period of 3 years. 

The goal of an ELSS fund is to help your money grow over a long time and help you save taxes through 80C. 

How do they do it?

Well, the government lets you reduce your taxable income by up to Rs 1.5 lakh if you invest in ELSS. 

This means you can save as much as Rs 46,800 on your taxes every year by putting your money in ELSS.

But, what about returns?

Investing in ELSS funds can give you much better returns in the long term compared to other 80C investments. 

Of course, it is riskier than others but if you are investing from a long-term perspective then, based on historical data, your wealth will most likely grow.

As you can see, ELSS funds on average, have made about 15% returns in the past 15 years which is pretty great.

Mind you, if you had picked one of the best-performing ELSS funds, you could have earned even more than this average. 

What about post-tax returns?

You can surely argue with me that a lot of 80C investments are tax-free on maturity whereas ELSS is taxed at 10%.

In that case, will it be wise to invest in ELSS? 

Let’s do a comparison and find out:

{Note:  Since PPF, EPF and FD rates keep on fluctuating, I have taken the interest rate on the higher side based on the historical data) 

Clearly, ELSS is way better even after deducting tax.

What should you do?

Well, ELSS funds are probably one the best forms of investment especially if you are looking for long-term wealth creation. 

On average, the NIFTY50 has given about 12% returns in the past fifteen years. Whereas, ELSS funds have given about 15% at the same time. 

However, this doesn’t mean that you go all in with ELSS funds because it’s important to diversify across different categories.

Ideally, one should look at the investment strategy of an ELSS fund before investing. They behave somewhat like a flexi-cap or a multi-cap fund.

Owing to its lock-in period, a lot of these funds may have higher exposure to small and mid-cap stocks which might not be suitable for your asset allocation. 

Therefore, make sure that the funds you are selecting don’t overlap with the existing mutual funds in your portfolio.

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Disclaimer: Investing in mutual funds is a personal choice. Kindly make sure to look at other parameters before investing. The 1% Club News team recommends consulting a SEBI-registered investment advisor.