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What is ELSS: Meaning, Benefits, and How to Invest

Investing may often seem challenging due to the struggle of balancing wealth creation and tax savings. However, this is where Equity-Linked Savings Schemes (ELSS) can come to your rescue. As someone who is looking for a product that allows you to invest in market-linked funds and also wants to reduce their tax liability, you must have come across or asked what is ELSS fund. Equity-Linked Savings Schemes have become one of the most popular and smart investment options among investors. So much so that experts suggest that ELSS should become a habit, especially for salaried taxpayers.7Read More

But what exactly are ELSS, and why are they considered so effective for long-term financial planning? Let’s break down ELSS meaning in simple terms.Read Less

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Written ByPalak Bagadia
AboutPalak Bagadia
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Palak Bagadia, Associate – Digital Marketing at Bajaj Allianz Life, with experience spanning content and performance marketing, recruitment, employee engagement in the BFSI industry.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 19th Jan 2025
Modified on: 22nd Jan 2025
Reading Time: 15 Mins
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What is an ELSS fund?

ELSS, or Equity-Linked Savings Scheme, is a type of mutual fund that primarily invests in equity markets, i.e., stocks. It combines the potential of offering returns with the added advantage of tax deductions. Simply put, it helps in both wealth creation and offers tax benefits under Section 80C of the Income Tax Act1. Rather, it is the only mutual fund that does so9!

In fact, if we discuss the ELSS fund benefits, one of them is equity exposure. Generally, 80% of the funds are invested in equity and equity-related instruments.2 In terms of diversification, ELSS funds invest across sectors and market capitalizations, which eventually spreads the risk. Hence, when you invest in ELSS, your money gets pooled along with other investors’ funds and allocated to equity stocks. Consequently, fund managers manage these investments actively to generate returns.

For example, let’s say you invest ₹1.5 lakh in an ELSS fund today. This amount will be locked for 3 years1. Over this period, the value of your investment will grow based on market performance. After the lock-in period ends, you can redeem the amount or maybe reinvest it for your long-term goals.
 

Why invest in ELSS?
 

For someone who wishes to invest in mutual funds and save on taxes Here are some ELSS fund benefits that you can expect.
 

1) Tax benefits

This is one of the most practical reasons. Investments in ELSS qualify for tax deductions under Section 80C (in case of old tax regime). This means that by investing ₹1.5 lakh, you can save up to ₹46,800 in taxes annually. 3

2) Wealth creation and higher returns

Since ELSS invests in equities, it offers the potential for  returns than regular tax-saving options like PPF or fixed deposits. Historical data shows that ELSS delivered 12% or more average annual returns over the last 10 years.4 Considering all this, ELSS can seem quite ideal for investors who are seeking growth.

3) Short lock-in period

Unlike other tax-saving schemes, such as PPF (15 years) or NSC (5 years), ELSS funds have a lock-in period of just 3 years, which makes them relatively  flexible1.

4) SIP option available

This is yet another  ELSS fund benefit. You can start investing in ELSS through Systematic Investment Plans (SIP), which allows you to contribute in small amounts regularly.5 Not only does this ensure affordability, but it also helps you benefit from rupee cost averaging.

5) Diversified portfolio

ELSS funds can invest in a mix of large-cap, mid-cap, and small-cap stocks.10 This offers you the opportunity to get a diversified portfolio.

6) Easy to invest and track
 

Investing in ELSS is generally a straightforward process. Monitoring your funds is also easy, as you can track the performance of your fund online.
 

Who should invest in ELSS?

Ideally, ELSS is suitable for:
 

1. First-time investors

ELSS is a starting point if you are new to equity markets but want to explore them while saving taxes.

2. Long-term planners

It is perfect for young professionals or individuals looking to build wealth for long-term goals like funding a higher education, buying a house, or planning retirement.
 

3. Tax savers

ELSS can be considered if you are a salaried individual looking to save taxes while growing your wealth.

4. Risk-tolerant investors

If you are someone who is comfortable with equity market fluctuations.
 

How to invest in ELSS?

Investing in ELSS is quite easy and can be done online or offline. Here’s how to get started:
 

1) Research and compare funds

Try looking for funds with a good performance track record, low expense ratio, and consistent returns over the years.

Tip: Try choosing an industry/ sector/ company that you understand. Intelligent investing relies on evaluating businesses within your circle of competence and understanding your limits.

2) Choose an investment mode:

Here, try choosing between a lump sum (investing a one-time amount) or SIP (investing monthly).8

3) Complete KYC:

Complete the mandatory Know Your Customer (KYC) process accurately. Make sure there are no mistakes, as they will only delay the process.

4) Invest through a platform:
 

You can invest via:
 

Mutual fund companies:
 

You can directly invest through the official website or app of a mutual fund company.
 

Brokers or agents:
 

Reach out to financial advisors or distributors to make informed and guided decisions.
 

Online platforms:
 

This is where it gets easy. You can invest in different online investment platforms for hassle-free investing.
 

Banks:
 

Many banks offer ELSS funds through their mutual fund branches.
 

5) Monitor its performance:

While ELSS has a lock-in of 3 years1, periodically monitoring its performance can help you make better financial decisions.
 

How to choose the best ELSS fund11, 12 & 13?

When selecting an ELSS fund, make sure you consider the following factors:
 

1. Past performance:

Look for funds with a consistent track record of returns over several market cycles.
 

2. Expense ratio:

Funds that come with lower expense ratios can translate to increase in net returns.

3. Fund manager expertise:

Always check the fund manager’s experience and track record.
 

4. Risk tolerance:

This is extremely important. Select a fund that aligns with your risk appetite only (be it aggressive or conservative).

5. Portfolio composition:

Make sure that the fund’s investment strategy aligns well with your financial goals.
 

Things to keep in mind before investing in ELSS

Just knowing what is ELSS is not enough. Here’s what you need to keep in mind before investing in it:

1. Risk appetite

ELSS is a market-linked product. Although it offers returns, it carries risk. Before investing, make sure you understand your comfort with market risks.
 

2. Investment horizon

Although the minimum lock-in is 3 years1, staying invested for 5 to 7 years can help you get more out of your returns.
 

3. Tax implications

While investments are tax-deductible, the returns are taxed as Long-Term Capital Gains (LTCG) at 12.5% for gains exceeding ₹1.25 lakh.

Bottom line

Summing up, ELSS is an option for anyone looking to save taxes and grow wealth. With their short lock-in period,  return potential, and flexibility, ELSS indeed stands out as one of the best tax-saving options in India. However, it also comes with its own set of risks. The key to getting the best out of this lies in analysing your risk appetite. All in all, make sure you choose your funds wisely, stay informed and updated, and invest for the long term to make the most of this opportunity.
 

Sources:

[1]https://cleartax.in/s/elss#

[2]https://www.livemint.com/mutual-fund/what-are-the-types-of-equity-mutual-funds-mintgenie-explains-investments-stocks-thematic-or-sectoral-funds-11708577233919.html

[3]https://cleartax.in/s/elss-calculator

[4]https://m.economictimes.com/mf/analysis/most-elss-funds-gave-12-or-more-in-10-years-why-should-you-invest-in-them/articleshow/95678874.cms

[5]https://cleartax.in/s/sip-lump-sum-invest-mutual-funds#

[6]https://m.economictimes.com/mf/analysis/mutual-funds-see-rs-8995-crore-inflow-in-mid-and-small-cap-funds-in-november-should-you-allocate-more/articleshow/116236225.cms

[7]https://www.livemint.com/mutual-fund/mf-news/why-investing-in-elss-funds-should-be-a-habit/amp-11679403941745.html

[8]https://www.businesstoday.in/personal-finance/investment/story/mutual-fund-sip-vs-lump-sum-investment-which-is-better-for-accumulating-a-multi-crore-asset-432397-2024-06-06

[9]https://cleartax.in/s/elss-vs-80c-investments

[10]https://appreciatewealth.com/blog/elss-mutual-fund-guide#:~:text=It%20is%20entitled%20to%20tax,cap%20stocks%20across%20various%20sectors

[11]https://economictimes.indiatimes.com/wealth/invest/how-to-select-the-right-elss-mutual-funds-to-invest/how-to-choose-the-right-elss-fund-evaluate-past-performance/slideshow/112547354.cms

[12]https://economictimes.indiatimes.com/wealth/invest/tax-saving-mfs-how-to-select-the-right-elss-mutual-fund/elss/slideshow/110794836.cms

[13]https://cleartax.in/s/best-elss-mutual-funds

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The views stated in this article are not to be construed as investment advice and readers are suggested to seek independent financial advice before making any investment decisions. Bajaj Allianz Life Insurance Company Ltd., Regd. office Address: Bajaj Allianz House, Airport Road, Yerawada, Pune - 411006, Reg. No.: 116, CIN: U66010PN2001PLC015959, Call us on toll free No.: 1800 209 7272, Mail us: customercare@bajajallianz.co.in

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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I hereby authorize Bajaj Allianz Life Insurance Co. Ltd. to call me on the contact number made available by me on the website with a specific request to call back. I further declare that, irrespective of my contact number being registered on National Customer Preference Register (NCPR) or on National Do Not Call Registry (NDNC), any call made, SMS or WhatsApp sent in response to my request shall not be construed as an Unsolicited Commercial Communication even though the content of the call may be for the purposes of explaining various insurance products and services or solicitation and procurement of insurance business

 

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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

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Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V04)

*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116


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^Subject to Section 10 (10D) conditions i.e. aggregate annual premium for ULIP policies issued on or after 1st February 2021 does not exceed Rs. 2.5 Lakhs.

1Minimum premium mentioned is applicable for Bajaj Allianz Life Goal Assure IV - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L204V01) and is subject to policy terms and conditions.

#Source: https://economictimes.indiatimes.com/investments-marts/eight-crucial-numbers-to-ensure-financial-success/10-times-the-annual-income-is-your-life-insurance/slideshow/16699748.cms . Subject to availability in Bajaj Allianz Life ULIP Plans. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com ) carefully before concluding a sale.

*Benchmark: Nifty 500 Multicap Momentum Quality 50 Index past 5 CAGR Returns, as on 31st December 2024. Past returns of a fund are not necessarily indicative of the future performance of the fund. | Please consult the financial advisor before investing.

The Unit Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of the fifth year.

ULIPs are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIPs are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. Bajaj Allianz Life Insurance Company Limited is only the name of the Life Insurance Company and Bajaj Allianz Life Future Wealth Gain IV - A Unit- linked Non- Participating Individual Life Savings Insurance Plan (UIN:116L202V01), Bajaj Allianz Life Goal Assure IV - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L204V01), Bajaj Allianz Life LongLife Goal III is A Unit-linked Non-Participating Whole Life Insurance Plan (UIN:116L203V01), Bajaj Allianz Life Invest Protect Goal III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L205V01), Bajaj Allianz Life Magnum Fortune Plus III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L207V01), Bajaj Allianz Life Goal Based Saving III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN:116L206V01) and Bajaj Allianz Life Smart Wealth Goal V - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L201V01) are only the name of the unit linked insurance contracts and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com ) carefully before concluding a sale.

Nifty 500 Multicap Momentum Quality 50 Index Fund is available Bajaj Allianz Life Future Wealth Gain IV - A Unit- linked Non- Participating Individual Life Savings Insurance Plan (UIN:116L202V01), Bajaj Allianz Life Goal Assure IV - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L204V01), Bajaj Allianz Life LongLife Goal III is A Unit-linked Non-Participating Whole Life Insurance Plan (UIN:116L203V01), Bajaj Allianz Life Invest Protect Goal III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L205V01), Bajaj Allianz Life Magnum Fortune Plus III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L207V01), Bajaj Allianz Life Goal Based Saving III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN:116L206V01) and Bajaj Allianz Life Smart Wealth Goal V - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L201V01)

In addition to the already existing funds, Nifty 500 Multicap Momentum Quality 50 Index Fund is now available with the above mentioned products. Customer has an option to choose from other available funds apart from Nifty 500 Multicap Momentum Quality 50 Index Fund.

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I hereby authorize Bajaj Allianz Life Insurance Co. Ltd. to call me on the contact number made available by me on the website with a specific request to call back. I further declare that, irrespective of my contact number being registered on National Customer Preference Register (NCPR) or on National Do Not Call Registry (NDNC), any Call made, including via Voice over Internet Protocol & WhatsApp, SMS or WhatsApp messages, in response to my request shall not be construed as an Unsolicited Commercial Communication even though the content of the call may be for the purposes of explaining various insurance products and services or solicitation and procurement of insurance business

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