Among the numerous options to chop off Rs. 1.5 lakhs from your taxable income through 80C, one of the better (in terms of ROI, hopefully!) ones is the ELSS. What exactly is this scheme? Basically, the government has authorized AMCs (asset management companies, or in layman’s terms, mutual fund houses) to create equity-backed funds (a basket of stocks, in other words), which qualify under ELSS. These are quite similar to mutual funds, as they are just a bunch of stocks, but unlike any mutual fund, an ELSS has the stamp from the government to enable the investor to claim tax benefit.

Lock-In period: A key feature of ELSS is that it has a lock-in period of three years. The amount invested is locked in the fund for three years. Does this have an implication for the investor? No! Equity-based investments are strictly for the long-term. Markets can fluctuate wildly in any three year term, and it is unrealistic for investors to achieve their goals through investing for short terms (let us say less than 10 years) in equity products. Basically, invest in ELSS, save tax, and forget about it for the next few years.

Taxation: While it is true that ELSS offers tax benefits by chopping a max of 1.5 lakh from the taxable income, there is taxation when the investment is eventually redeemed. As per current taxation rules, a 10% LTCG (long-term capital gain) tax is levied on the gains over Rs. 1 lakh. 10% may not be much, but does eat into your returns!

Expense Ratio: Another dampener in these schemes is the expense ratio of the funds. Being actively managed by the AMC’s, the expense ratio tends to be high for ELSS products. To give an example, 1. HDFC Tax Saver Growth Direct Plan – 1.24% 2. Kotak Tax Saver Growth Direct Plan – 1.26% 3. LIC MF Tax Growth Direct Plan – 1.49%, are some big-name companies’ ELSS products with rather prohibitive expense ratios.

Does Liquidity Matter?: An important question for investors before any mutual fund investment is the liquidity of the product. That is, if the investor wants to redeem his/her units at some point in time, will it be possible to do so at ease? This is usually a function of the asset under management (AUM) for the fund. More the money that is poured into a fund, more liquid the fund is, and the fund is likely to retain its value at redemption. With a 3-year lock-in period, speculators are essentially shown the door in ELSS’s. This gives greater freedom for AMC’s to invest as they choose, and this in turn benefits the fund and the investors. Tl/dr: No, liquidty is not a problem generally.

Where does my money go? How do the AMC’s manage to deliver the returns? Ultimately a performance of ELSS fund is dependent on the stocks that it encompasses. When the overall market is down due to macroeconomic factors and investors’ pessimism, then ELSS’s are bound to give low or negative returns. In general, ELSS’s tend to be multicap, that is, the fund managers have freedom to invest in big, small or medium-sized companies listed on the exchanges. Small-caps tend to be riskier bets, and large-caps less so. For individual ELSS’s, it would be good practice for an investor to check the holdings periodically to get a good outlook of the fund performance.

Recommend me something! Many choices here, more or less the same all things considered.

Name of ELSS fund	Expense Ratio	Allocation to Large-Mid-Small Caps in %)
Mirae Asset Tax Saver Growth Direct Plan	0.23%	72-18-8
Axis Long Term Equity Growth Direct Plan	0.93%	67-24-8
Motilal Oswal Long Term Equity Growth Direct Plan	0.78%	70-20-10
Aditya Birla Sun Life Tax Relief 96	0.98%	40-40-15

A standout recommendation in this space is the Mirae Asset Tax Saver Growth Direct Plan, which has a good track record and a low expense ratio of 0.23%. It has approx 70%-20%-10% split in large, medium, and smallcap sectors, which points to a relatively safe bet within the space.