ELSS Funds are diversified equity funds. These funds primarily invest in stocks of companies in a specific proportion according to the investment objective of the fund. The stocks are chosen from across market capitalisation and industry sectors. These funds aim to achieve capital appreciation over the long run. The fund manager picks stocks after conducting an in-depth market research to deliver optimal risk-adjusted portfolio returns. As compared to other tax-saving avenues, these funds have the shortest lock-in period of three years. Investing in ELSS Funds makes you eligible for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. In this way, you can reduce your tax liability as the amount invested by you gets deducted from your taxable income.

ELSS Funds carry a relatively higher risk as compared to debt funds and balanced funds. The NAV of the fund may fluctuate on account of market swings. As these funds have a well-diversified portfolio, the risk gets spread out among the underlying securities which are held by the fund. In addition to this, when you stay invested for long term, these risks tend to smoothen out to give you average returns. As compared to other funds, the fund manager of an ELSS Fund is better positioned to take comprehensive bets due to the three year lock-in period. It results in higher return on investment for the investors. Historically, ELSS funds have known to deliver average returns of around 12%-15% over a period of more than 5 years.

ELSS Funds are suitable for aggressive investors who are looking for wealth creation opportunities over the long run. Since these funds have a compulsory lock-in period, you should be ready to stay invested for that duration and structure your financial plans accordingly. Investors in the higher tax bracket may invest in these funds to save taxes. It is because the long term capital gains up to Rs 1 lakh are tax-free. Moreover, the gains exceeding Rs 1 lakh are taxed at the rate of 10% without the benefit of indexation. You may invest in ELSS Funds to accumulate wealth for children’s education, planning for retirement and other long term goals.

Your investment objective, risk profile and investment horizon need to be the starting point for all kinds of investing. You may compare the ELSS Funds based on risk-adjusted returns in order to pick the right fund. In addition to this, you may also compare alpha of the peer funds. The fund which generates a higher alpha would be regarded as a good investment opportunity. Also, you may invest in direct plans of ELSS Funds on Paytm Money App. The direct plans have a lower expense ratio which helps you to earn up to 1% higher returns than regular plans. If choosing the right fund seems tricky, then you can also explore ‘Investment Packs’ on our app.