Financial planning plays a crucial role in an individual’s career. Numerous savings and investment schemes aid investors in accomplishing their financial goals. One such effective investment channel is mutual funds that has gained popularity thanks to its attractive returns.

Equity Linked Savings Scheme or ELSS is a well-known investment option under mutual funds. It is a type of mutual fund that predominantly invests in equity and equity-related instruments. Since ELSS mutual funds invest in companies listed on the stock exchange, they have the potential of generating higher market-linked returns. Additionally, ELSS aretax-saving investments that entitle you to claim a tax deduction of up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961.

Typically, ELSS funds are classified into four categories. Here we look into the types of ELSS funds in detail.

• Large-cap ELSS funds

Large-cap funds invest primarily in blue-chip companies that have a large market capitalisation. These companies are considered reputable, trustworthy and rank among the top 100 listed companies. Large-cap equity funds deliver stable returns over an investment horizon of five to seven years. These are best suited for investors havinga low-risk appetitewho expect stable returns.

·         Mid-cap ELSS funds

Mid-cap funds primarily invest in companies listed between 101 and 250 in terms of market capitalisation. The stocks of these companies are considered slightly volatile and therefore,are known to offer higher returns compared to their large-cap counterparts. Mid-cap funds are ideal for investors having a high-risk tolerance and looking for high returns.

·         Small-cap ELSS funds

Small-cap funds invest in companies thatrank among the top 250 and have asmaller market capitalisation.These are high-growth companies that could show potential. These companies are known to offer high returns but also carry a slightly higher risk. Since these funds are more volatile compared to other funds, they are preferred by risk-bearing or aggressive investors who seek exceptional gains in the short-term.

• Multi-cap ELSS funds

Multi-cap funds invest across a spectrum of company stocks with different market capitalisations. These funds are considered flexible as they can quickly adapt to changing market situations. They are relatively more stable compared to small-cap and mid-cap funds and could compound wealth better than other fund categories. Multi-cap funds are a preferred choice of conservative investors who have a longer investment horizon.

Conclusion

With different types of tax saving mutual funds available in the market, choosing the best one can be challenging. However, you can make this choice simple by following an easy mantra – “Understand your financial planning, identify your risk tolerance and consider your investment horizon”.

ELSS is an excellent tax saver mutual fund. However, when you decide to invest in ELSS, it is imperative to read all the policy documents carefully.

Tom Gardner