Here’s why ELSS should be your first mutual fund

Equity Linked Savings Scheme (ELSS) is a type of mutual fund that provides tax savings under section 80C of the Income Tax Act. Investments made in ELSS up to Rs.1.5 lakhs are eligible for deduction from your taxable income under section 80C. This helps reduce your tax liability. The lock-in period for ELSS funds is 3 years, which is the lowest among tax-saving instruments.

Why should ELSS be your first choice?

There are several reasons why ELSS makes for a good first mutual fund investment:

Higher returns than traditional tax-saving options

Compared to other common tax-saving instruments like PPF, NSC, etc. which offer fixed returns, this tax saver mutual fund invests in equities and hence provides higher inflation-adjusted returns in the long run. The power of compounding in ELSS helps your money grow faster. 

Tax-saving with growth potential

ELSS allows you to save tax under section 80C as well as benefit from equity market growth. The returns from ELSS are linked to stock market performance. So it offers twin benefits of tax-saving and wealth creation.

Low lock-in of 3 years

The lock-in period for ELSS funds is only 3 years, which is the lowest among all section 80C options. This provides flexibility to withdraw your money after 3 years and invest somewhere else if desired. 

Professional management

ELSS funds are professionally managed by expert fund managers. They have the skill and resources to invest across market cycles. This gives an edge compared to investing directly in equities, especially for first-time investors.

SIP option available

You can invest in these tax saver mutual funds through Systematic Investment Plans (SIPs) starting with as low as Rs.500 per month. SIPs help in rupee cost averaging and investing discipline.

Wealth creation in long run

Equity exposure helps ELSS funds deliver inflation-beating returns over long investment horizons of 5 years or more. The power of compounding helps accelerate wealth creation.  

How to choose the right ELSS fund?

Returns over long term 

Look at the fund’s performance over 3-year and 5-year periods. Ensure there is consistency in returns over different market cycles. 

Risk-return profile

Evaluate the fund’s returns over the risk it has undertaken. Choose a fund that has delivered good returns with controlled risk. 

Portfolio and fund managers

Analyze the portfolio in terms of sector and stock exposure. Check the experience and track record of the fund managers.

Costs

Compare the expense ratio of direct plans of ELSS funds. Choose a fund with low costs.

Ratings

Check ratings from analysts to gauge how a fund has performed on various parameters. Choose highly rated funds.

Conclusion

ELSS makes for an attractive first mutual fund investment due to its combined benefits of tax-saving, wealth creation potential, low lock-in, equity exposure and SIP option. For young investors, ELSS can lay a solid foundation for long-term financial growth and successful investing journey ahead.