How to use Tax Saving Mutual Funds (ELSS) for a goal

best elss funds 2020

What are ELSS Funds?
Equity Linked Savings Scheme, better known as ELSS Funds or Tax Saving Mutual Funds allow an individual or HUF to invest in a diversified equity mutual fund to claim a deduction up to Rs. 1.5 Lakhs under Section 80C of the Income Tax Act 1961.

These funds allow an investor to claim dual benefits of tax saving along with availing equity growth.

Why you must move on from a tax saving mindset to a tax planning mindset?
Pick out any business related newspaper or website in the month of February or March of each year and the words ‘’Tax Season’’ will be mentioned without fail several times.

This is sadly a testament to a larger issue of poor planning on the part of investors when it comes to their taxes. Planning is not restricted to any season, in fact no matter when you begin you will always be late but the earlier you start, the better.

Another issue this mindset of making tax saving investments at the last moment is that it welcomes a sense of panic that could be avoided. Never underestimate the frailties of human behavior under stress, a student under-prepared would use the calculator to cross check what is 4 plus 3 because that’s just how pressure works.

Under stress and a strict deadline, investors often tend to take the wrong call for the fear of missing out on saving taxes for the current financial year.

These wrong decisions include:
  1. Wrong choice of elss fund
  2. Over Diversification
  3. Making Lump Sum investments
  4. Not attaching tax saving fund to a goal

The solution to get over these manifold issues is to:
  1.  Start tax planning on 1st April of the financial year and not 31st March
  2. Move on from tax saving mindset to tax planning mindset.

tax on mutual funds

What is not tax planning?
     Investing during the last month, week or in some cases even last day of the financial year.

Investing in the best ELSS scheme,t
op rated and most suited are two different points.

Investing without any consideration for strategy applied by Fund. 

    A tax planning mindset would mean that you are planning first and saving later.

How to invest in Tax saving mutual funds?
There has often been considerable debate among the investor community as to which mode one should prefer to make investments into Tax saving funds, lumpsum or SIP.

For tax saving either would do but for tax planning SIP is more valuable to invest in elss mutual fundsfor the following reasons:

  1. When one does an SIP, he/she does not need to time the market (not as if that is possible). But can keep his/her investments in auto mated mode via SIP facility.
  2. Using SIP, one can avail of rupee cost averaging that comes along with it.
  3. If one uses the Lump Sum route at the last moment then there is a high chance of panicking due to lack of time which may lead to ill-suited choice of funds.
  4. SIP is all the more beneficial during a market downtime since you would be accumulating more units at a lower price. This is not possible when the markets are at a high and you make a lump sum investment.
  5. When you divide your SIP’s over a period of 12 months, you open yourself to the possibility of availing benefits of rupee cost averaging without consideration for market conditions.

Now imagine it’s the month of March and time is running out, you thereby are now forced to make a Lump Sum investment at times with no proper planning beforehand. In case the markets are doing really well you would be buying at a high. Now this becomes an issue if you redeem the same after 3 years and the markets are hovering around the same place as it was when you did the investment.

Keep in mind that there have been instances in the past that the month of March in a financial year has done much better than the rest of the year. Now if you had done an SIP you would have been at an advantage since you would have bought more units at a lower price but in case of Lump Sum investment in a market high you would get fewer units at a higher price.

Of course equity investing is not as black and white as portrayed but the point still remains, tax planning any day supersedes tax saving.

How to link your ELSS Funds to a goal?
If your mutual funds are not linked to a goal then your investments are not planned.

Hypothetically let’s assume you can invest up to Rs 60000 in a given financial year. This would mean a monthly SIP of Rs 5000 for a year.

Every SIP installment is counted as a fresh investment so therefore each installment would have to complete the lock in period of 3 years.

The following example will guide you on how to use ELSS investments of 5 years for a 10 year goal.

best tax saving mutual funds

ELSS investments in the above example has been done for the following financial years


The above example is a classic case of the value of long term growth and benefits of compounding.

*Investments have been made for 5 years but have stayed invested for 10 years.

Past performance is no guarantee of future returns and this caveat is true for any equity scheme and not just ELSS funds.

Before we get to how you can link your ELSS schemes to a goal, do take cognizance of the following points

  1.          Amount of Investment
  2.          Time horizon
  3.          Risk Appetite

What are the goals you can consider to link with Tax Saving Funds?
These should ideally be Long Term goals, say anything up to 10 years and above. The longer you invest and the longer you stay invested the better.

These goals could include the following as an example

  1.          Child’s Higher Education
  2.          Child’s Wedding
  3.          New House

You can also look at it as your retirement fund but in that case you would have a longer time horizon as compared to the above points.

Why you must link your ELSS funds with a goal?

top elss funds

The wealth gain in the above example is double the amount invested, investments have been done for a period of 5 years but have stayed invested for 10 years.

All the types of goals mentioned above need a time horizon of 10 years.

The reason for such exemplary performance of these schemes can be better understood for their portfolio allocation.

dsp mutual fund

  1. ELSS Funds have no restriction when it comes to category unlike Large Cap, Mid Cap and Small Cap Funds. This means the fund manager has a free run across sectors and categories he/she has a firm conviction on.
  2. Not all Fund managers employ the same strategy though, some tend to be more aggressive than the rest comparatively. In other equity funds a fund manager may be restrained in his choices for higher risks no matter how calculative, often leads to more drops too in case the markets are bleeding.
  3. This would lead to higher rates of redemptions, as was the case with Hybrid Aggressive funds in 2019.
  4. With ELSS Funds though, a Fund Manager has no fear of redemptions at least for the next 3 years since the date of investment. This would mean a longer time horizon for his stock pickings. (This approach opens the door to look for cyclical businesses).

As can be witnessed from the image, almost 27 % of the entire portfolio is allocated to mid & small caps,so more than a quarter of the entire portfolio is completely aggressive.

aditya birla equity mutual fund

  1. 6.29 % of the entire portfolio is allocated to mid & small caps,that’s more than half of the portfolio.
  2. On the basis of the above observation, it is fair to conclude that DSP Tax Saver Fund is more conservative than Aditya Birla Tax Saver Fund which proves our above point of every Fund Manager having his/her own unique approach to the Fund since he/she is not bound by any sector or category.
  3. Even though you cannot redeem your investments before 3 years, the approach a fund manager takes is important since aggressive funds tend to fall more and rise more whereas conservative funds tend to fall less and rise less too.
  4. Hypothetically let’s assume that the returns eventually are more or less similar and yet approaches matter since the level of volatility is directly proportionate to how calm you are towards your investment. 

An investment that makes you money but takes away your sleep is not a sound investment. (This is more applicable to investors viewing their mutual fund portfolio on a daily or weekly basis)

How ELSS funds compare to other Tax Saving Instruments?

Minimum InvestmentRs 500Rs 500Depends on PremiumRs 1000
ReturnsMarket Linked8%Market Linked6.5% to 7.25% *
Lock in Period3 Years15 Years5 Years 5 Years
*Approximately, varies from bank to bank.

Why Tax saving mutual funds can be a substitute for Multi Cap Funds?

  1. ELSS schemes and Multi Cap Funds are similar to the extent of not having any mandatory asset allocation. Meaning they are not restricted to categories unlike Large, Mid, Small, Large & Mid Cap schemes, etc.
  2. Therefore at times both these schemes in your portfolio may have a tendency to overlap. This is more so the case with schemes of the same AMC.
  3. In case they do, you would be better off with a scheme from another category or schemes from different AMC’s.
  4. When you compare the below images of Multi Caps with the earlier Tax Saving Funds, you would conclude that more or less, schemes of both categories are largely biased towards large caps.

sbi mutual funds

kotak mutual funds

 Remember, if you cannot explain your diversification then you do not have a diversified portfolio.

How linking your ELSS Funds to a goal helps?

  1. When you know what approach the scheme is applying, it opens up space in your portfolio. For eg if your tax saving fund is applying a Multi Cap scheme then you need not have another scheme from Multi Cap category, same with the case of Large & Mid Cap scheme and so on.
  2. The above approach avoids duplication in your portfolio, duplication of schemes has always been a worry but it has become all the more important in recent times with Mutual Funds garnering considerable support as an investment option.
  3. When you attach your goal to a fund, it becomes easier to stay invested when things are down. This is because knowing why you started works as your biggest support, abandoning a project mid -way is much easier when you do not know where you are headed.
  4. When you link your ELSS Funds to a goal, it not only opens up space in your portfolio but also saves money. For eg if you are investing Rs. 5000 towards a goal, the same Rs. 5000 can now be invested via ELSS schemes, this means the earlier Rs. 5000 can now be linked towards another goal or for that matter can be looked at for a completely different instrument (like debt).

 Only when we move on from a Tax Savings mindset towards a Tax planning mindset will ELSS Funds find its true value in a portfolio.


Which mutual fund is best for tax saving?
There are no best mutual funds for tax saving per se but there are most suited funds for tax saving as per one’s risk profile. We have discussed above the volatility attached to different approached to ELSS Funds in DSP Tax Saver Fund and Aditya Birla Tax Saver Plan.

Which mutual funds are eligible for 80c?
Only Tax Saving (ELSS) Mutual Funds are available for deduction under 80C of the Income Tax Act.

Can ELSS be redeemed before 3 years?
No, ELSS Funds cannot be redeemed before 3 years. For the purpose of calculation, each SIP installment will be treated as a fresh investment and each of these investments have to complete 3 years individually.

Can you stay invested beyond the lock in period of ELSS Funds?
Yes and it is advisable to stay invested as long as possible since Equity Mutual Funds require a minimum time horizon of 5 years. 

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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