Investors who wish to invest for a minimum of 3 years and are looking for higher return potential, plus the added benefit to save tax under section 80C can invest in ELSS Tax Saver Fund. At the same time, the investors should also prepare for a certain amount of risk attached to it. This is because of the equity exposure in the portfolio. Therefore, ELSS mutual funds are best suited for investors who understand equity asset class risk. These tax saver funds offer higher returns potential when compared to other tax saving schemes.

The following are the critical factors that must be considered by investors before they invest in ELSS Tax saver fund:

• Investment horizon: The investor must have a three-year investment horizon to contemplate investing in ELSS funds. To limit market volatility, the equity exposure of ELSS funds necessitates a longer investment horizon.
• Returns: ELSS funds do not give guaranteed returns as they are wholly dependent on the performance of the underlying securities.

Yes, ELSS has a lock-in period of three years. This means one cannot withdraw their money before the said tenure ends. However, ELSS has the shortest lock-in period as compared to other similar tax-saving investments currently such as 5-year Fixed Deposits (five years), National Savings Certificate (five years), Public Provident Fund (15 years), etc.

• Dual benefit: ELSS funds are the only type of funds in the Indian market, that give the dual benefit of a tax rebate and wealth appreciation. Under Section 80C of the Income Tax Act, 1961, who fall in the higher income tax brackets, can save up to Rs 46,800 in a year if they invest Rs 1.5 lakh per annum in ELSS and are in the 30% income tax bracket. However, Investor will get a maximum tax deduction of Rs 1.5 lakh per year in ELSS under Section 80C even if they invest more than this amount.
• Shortest lock-in: Currently, ELSS has the shortest lock-in period of three years under Section 80C of Income Tax Act 1961.
• Potentially higher returns: Unlike ELSS where return is market linked, other 80C investments like PPF or FDs are fixed income products. ELSS has the potential to generate significantly higher wealth in a medium to long-term investment horizon.

The redemption proceeds of ELSS are not entirely tax-free. The long-term capital gains of up to Rs 1,00,000 a year are tax-free, and any gains above this limit attract a long-term capital gains tax at the rate of 10% plus applicable cess and surcharge.

The investment objective of the scheme is to generate long-term capital appreciation through investments made predominantly in equity and equity related instruments. However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved.

The Fund’s strategy will endeavor to have a predominantly higher allocation to mid and small cap companies which will be selected through focusing on the fundamentals of the business, the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company and the key earnings drivers. The scheme will invest in about 30-40 scripts to ensure adequate diversification and reduced risk.