Best ELSS (Tax Saving) Mutual Funds, Scheme, Returns, Benefits

Mutual funds are growing in popularity as many people are showing keen interest in investment. An amateur investor will always prefer risk-averse investment portfolio like debt funds, a conservative will choose assets with the medium risk that includes a balanced portfolio consisting of debt and equity, and an aggressive investor will opt for risky funds like equity. One thing about risky financial instruments is that they offer maximum returns, just like Equity Linked Saving Scheme (ELSS). If you have a high-risk tolerance and a long-term perspective, then you can choose the best ELSS funds.Not just risk-takers, ELSS is also suitable for young investors, who want ready to take a risk and explore mutual fund. You can unleash the power of compounding to enjoy high returns. Let’s get to know what is ELSS funds

ELSS funds mostly invest a large percentage in equity assets, and it has a lock-in period of 3 years. Amongst all the options, ELSS mutual funds are the only taxing saving investment. It generates returns in the range of 10-12% in the long-run, which highest compared to tax-saving options. One can easily invest in ELSS through SIP or lumpsum with no limit on the maximum investment amount.

As an investor, ELSS gives you three options in terms of investment. These include Growth Option, Dividend Option and Dividend Reinvestment Option

Growth Option:

As the name suggests, this type of fund allows you to grow funds and accumulate wealth. Under this, whenever a scheme performs well, the Net Asset Value (NAV) surges automatically and vice-versa. A well-performing asset generates profit that you can only get back the profit once you sell the units.For instance, if you buy 100 units of an equity fund at a NAV of ₹40. If the value of the increases to ₹ 50 in a year and you sell the assets at this price. You will receive a sum of ₹5,000, and your profit would be ₹1,000.

Dividend Option:

An investor gets returns or profits, which is paid in the form of a dividend. Whenever a scheme performs well, fund manager distributes the gains among the investors by way of dividend. Fund managers pay dividends quarterly, half-yearly or annual basis. The dividend is distributed when only when the NAV of a fund increases; however, if the fund has negative income, there is no dividend.For instance, if you invest ₹10 in ELSS dividend option. If the NAV of the fund grows to ₹15, the fund manager will declare ₹2 as a dividend. After dividend payout, the NAV of the fund will be ₹13.

Dividend reinvestment option:

Under this, the dividend derived from a fund is reinvested in another scheme. This is the best options, especially when the market is good, and you predict it to stay the same way.Which one should you select from the three options?

• If your investment goal is to earn a regular source of income, you can choose to invest in Dividend Option as a Dividend Reinvestment Option does not offer a substantial advantage.
• If you want to opt for a long-term investment plan, you can select a Growth option, as you do not have to worry about the investment the cashflows.
• When it comes to taxation, you need to know that equity growth funds attract a tax rate of 15% if held for short-term, while long-term capital gains are tax-free in the hands of the investor.

The bottom line is choosing the ELSS fund option should totally depend on your investment risk, goals and financial capability. To pick the best ELSS mutual fund, you need to evaluate fund returns, fund history, expense ratio and various other parameters. Additionally, your fund manager also plays a significant role as his experience in building a strong portfolio will help to derive maximum returns.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.