What are ELSS Funds, and how do you invest?

Equity-Linked Savings Schemes (ELSS) in India are a unique type of tax-saving mutual fund. They stand out from the broader category of mutual funds by allowing investors to save on taxes while investing in equity. This is made possible by combining Section 80C tax deductions with the benefits of equity investing. ELSS is a popular choice among long-term investors due to its 3-year lock-in period, which allows for tax savings and opens up the potential for significant gains.

One of the critical features of ELSS funds is the mandated 3-year lock-in period. This period encourages a disciplined investment approach, making it an attractive option for risk-takers looking for long-term gains. Importantly, this lock-in period safeguards against impulsive exits, ensuring investors stay committed to their investment strategy.

ELSS Funds offers three investment options:

Growth, Dividend, and Dividend reinvestment.

• While choosing the Growth option, dividends are not distributed. Instead, your returns accumulate within the fund, increasing Net Asset Value (NAV). Recognizing that this approach entails market risk despite the potential for enhanced earnings is crucial.
• Choosing the Dividend option in ELSS means receiving regular dividend payments, which are taxed based on your bracket. A 10% TDS is applied to dividends over Rs 5,000. This is vital for tax-saving and ELSS investors. Select ELSS funds wisely to match your goals and risk tolerance.
• In the Dividend reinvestment option, investors reinvest their dividends, increasing their investment's Net Asset Value (NAV). This strategy is particularly advantageous in periods of market growth when a consistent rise in value is expected.