Unlocking Wealth: The Comprehensive Guide to ELSS Mutual Funds

In the realm of investment options, Equity-Linked Savings Scheme (ELSS) mutual funds have emerged as a popular and lucrative choice for both seasoned investors and newcomers to the financial world. This article delves into the intricacies of ELSS mutual funds, exploring their benefits, risks, tax advantages, and the factors to consider before investing.

ELSS Mutual Fund

Understanding ELSS Mutual Funds

What are ELSS Mutual Funds?

ELSS, or Equity-Linked Savings Scheme, is a category of mutual funds that primarily invests in equity and equity-related instruments. As per the ELSS notification at least 80 percent of the ELSS funds should be invested in equity and equity-linked securities. It offers investors the dual advantage of potential high returns coupled with tax benefits under Section 80C of the Income Tax Act.

The Growth Potential

ELSS funds have historically demonstrated the potential for significant capital appreciation over the long term. Due to their equity exposure, they have the capacity to outpace inflation and generate substantial wealth.

Tax Benefits

One of the most attractive features of ELSS funds is their tax-saving potential. Investments made in ELSS funds are eligible for a deduction of up to ₹1.5 lakh under Section 80C. Moreover, the gains from ELSS funds are tax-free up to ₹1.5 lakh, making them an enticing option for tax-conscious investors. However, if you have a joint holding in ELSS fund, the tax benefit would be available to the first holder.

In Union Budget 2020, finance minister introduced new tax regime and made it default regime since Union Budget 2023. This new tax regime removed most of the tax exemption including section 80C of Income Tax. If you opted for new tax regime you will not be able to use tax benefits under section 80C and consequently ELSS funds will not be help you in tax-savings.

Investing Wisely: Factors to Consider

Risk and Return

ELSS funds, being equity-oriented, carry a certain degree of risk. However, they also offer the potential for higher returns compared to traditional tax-saving instruments like Fixed Deposits and Public Provident Fund (PPF). Investors should assess their risk tolerance before allocating funds to ELSS. Over a period of 10 years average industry returns from ELSS funds clocks over 14% whereas during the same period safe option like PPF (Public Provident Fund) gave 8.3% returns.

Lock-in Period

ELSS funds come with a mandatory lock-in period of three years, which is the shortest among tax-saving investment options. This tenure encourages long-term wealth accumulation and curbs impulsive withdrawals.

Fund Selection

Choosing the right ELSS fund is crucial. Factors like fund performance, portfolio composition, and the fund manager’s track record should be meticulously analysed before deciding.

Systematic Investment Plan (SIP)

SIPs offer a disciplined approach to investing in ELSS funds. By investing a fixed amount at regular intervals, investors can take advantage of rupee cost averaging and reduce the impact of market volatility. One key thing investor should keep in mind in case of SIP in ELSS fund is that each investment would be locked-in from the date of the respective investment. So, each SIP instalment will be locked in for 3 years.

The ELSS Landscape: Exploring Different Funds

Diversified ELSS Funds

These funds invest across various sectors and industries, spreading risk and potential returns. They are suitable for investors seeking balanced exposure.

IDCW (Dividend) vs. Growth Option

Investors can choose between Income distribution cum capital withdrawal, IDCW (previously known as dividend) and growth options. The IDCW option provides periodic payouts, while the growth option aims for wealth accumulation through capital appreciation. There used to be third option of IDCW reinvestment. If one opts for (dividend) Income distribution cum capital withdrawal reinvestment plan, each time a dividend is reinvested, the same would also attract a 3-year lock-in. This use to create confusion among investors so now most AMCs have done away with this option in case of ELSS.


In the pursuit of wealth maximization with tax benefits, ELSS mutual funds stand as an exceptional choice. Their potential for high returns, coupled with the advantage of tax savings, makes them a compelling investment avenue. However, it’s imperative for investors to conduct thorough research, evaluate their risk tolerance, and align their investment goals before diving into the world of ELSS funds.


Are ELSS funds suitable for risk-averse investors?

  • ELSS funds carry a certain degree of risk due to their equity exposure. While they offer the potential for higher returns, risk-averse investors should carefully assess their risk tolerance before investing.

Can I withdraw my investment before the lock-in period ends?

  • No, ELSS funds have a mandatory lock-in period of three years. Premature withdrawals are not allowed during this period.

What is the tax treatment of gains from ELSS funds?

  • Gains from ELSS funds are tax-free up to ₹1.5 lakh under section 80C of Income Tax.

How do SIPs benefit ELSS investments?

  • Systematic Investment Plans (SIPs) offer a disciplined approach to investing in ELSS funds. They allow investors to mitigate market volatility and take advantage of rupee cost averaging.

Can I switch from the IDCW (Dividend) to the growth option within an ELSS fund?

  • Yes, many ELSS funds allow investors to switch between IDCW (Dividend) and growth options. However, it’s advisable to check the fund’s specific guidelines before making the switch. Such switching of option results in capital gains/loss.

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