An Equity Linked Savings Scheme (ELSS) is a diversified equity schemes offered by mutual funds in India. This scheme can be used to save income tax of up to Rs. 1.5 lakh under Section 80 C of Income Tax Act 1961. ELSS can be invested using both SIP (Systematic Investment Plan) and lump sums investment options. It is a mutual fund that has to invest a minimum of 80% in equity shares. The balance 20% can be in debt, money market instruments, cash or even more equity. There is a three year lock in period for the ELSS mutual funds. For tax purposes, returns from an ELSS scheme are tax free.

It can be seen that in the long run, equity gives a much higher inflation adjusted returns when compared with any other investment, except for maybe real estate. The top five ELSS funds have given returns from 22% to 26% compounded annually over the past five years. This is higher than the market over the same period which is at 19%.

ELSS has an option for salaried people with a tight budget for a monthly investment. The automatic investment from the bank through ECS makes it any easy way to invest. The people who want an income in between can opt for the divided option. It is particularly suitable for senior citizens.

A thorough research must be done when you invest in an ELSS fund. You must look at the long term performance of the fund before putting your money in it. Fund details like the fund manager’s investment approach, portfolio of the fund, the expense ratio of the fund and how volatile the fund has been in the past must be looked closely.

High inflows into ELSS funds are determined by the performance of the stock market in general. If an investor gets better tax – adjusted returns from other investment avenues like debt, he will prefer to go for this as risk is lower. Over a long term, ELSS funds are the best tax saving instruments, especially if you are an inventor who can take on high risk. The success of this category of mutual funds depends on the tax treatment it receives under the DTC.