ELSS Mutual Fund: How does it work? Who should invest in it?

Investing in the stock market is an excellent way to garner significant returns. However, taxes can hamper the growth of the same. To avoid such occurrences, many investors turn to Equity Linked Savings Schemes. Also called ELSS, these are Mutual Fund Investment schemes that help investors save on income tax. Hence, they are also viewed as Tax-Saving Funds. Here is a quick guide on how such funds work, who should invest in them, and more.

How do they work?

ELSS Funds are diverse Equity Funds. They predominantly invest a specific proportion in listed companies' stocks per the fund's investment objective. These stocks are selected across market capitalisations such as Large, Mid, Small-Cap, etc., and industry sectors. ELSS Funds aim to increase capital appreciation over time.

For this, the fund manager chooses stocks after thorough market research. The reason for such an assessment is to offer the best risk-adjusted portfolio returns to the investor.

Ways to invest in ELSS Funds

Growth option- Under this option, you get the returns only at the time of Mutual Fund redemption. You are not entitled to perks like dividends. Also, the returns in this option are subject to market risks.

Dividend option- You are entitled to receive timely dividends in the dividend option. However, the dividends are only declared in the presence of excessive returns. Besides, you are expected to pay tax on the dividends as per their income tax slab.

Dividend reinvestment option- In this option of ELSS, you can reinvest the received dividends into the same scheme. Hence, it is ideal when the markets fare well and seem like they will remain so.

Once you choose the ELSS Fund, you can invest via a Systematic Investment Plan or a Lumpsum Investment. In SIP, you invest a small amount at regular intervals for a fixed period. In a Lumpsum Investment, you invest a sizeable chunk in one go.

Who should invest in ELSS Funds?

The main appeal of ELSS Funds is their tax benefit feature. Hence, anyone looking to save taxes as per Section 80C should consider investing in these funds. It is also essential to note that ELSS carries certain risks because of the portfolio's equity exposure. Hence, it is suited for investors who understand equity asset class risks.

ELSS Funds also attract higher returns in comparison to other Tax-Saving schemes. So, investors should be patient and devise long-term plans for their ELSS investments.

Quick tips to remember before investing in ELSSAlways opt for a reputed fund house or banking portalAssess your risk appetite and market experienceInspect the fund's long-term performance and compare it against its benchmark index and peers

Look for funds that have offered consistently high returns and seek professional guidance if lost