ELSS (Equity-Linked Savings Scheme) is a tax-saving mutual fund that invests in stocks and also helps you save tax under Section 80C. If you follow the old tax regime, you can claim a deduction of up to ₹1.5 lakh a year under Section 80C for eligible investments, including ELSS. This can reduce your taxable income.

One important feature that sets ELSS apart from most regular equity mutual funds is the 3-year lock-in period. You cannot redeem your ELSS units before the lock-in period.

For example, if you invest ₹10,000 on 1 April, 2026, those units will be eligible for redemption after 1 April 2029. If you invest via SIP, then each instalment gets its own 3-year lock-in. So an instalment invested in April 2026 unlocks in April 2029, while an instalment invested in May 2026 unlocks in May 2029.

ELSS mutual funds may suit you if:

• If you file a tax return under the old regime: Section 80C deduction can make ELSS useful for tax planning, provided you are eligible to claim it.
• If you can stay invested for at least 3 years: You cannot withdraw your investment during the lock-in period. But if you have a long horizon, they can be a good choice.
• If you are looking for long-term growth: Although the lock-in period is only 3 years, equity investments have the potential to give better returns in the long run. You can benefit from compounding over time.

If you follow the new tax regime and cannot use the Section 80C deduction, the tax-savings benefit of ELSS may not be relevant for you.

When you invest in an ELSS fund, your money is pooled with other investors' money. The fund manager then invests this money in a portfolio of stocks. The fund can invest across large-cap, mid-cap and small-cap companies, depending on its investment strategy.

Imagine you invest ₹10,000 in an ELSS mutual fund when its NAV is ₹50. You would receive 200 units. (₹10,000/₹50). In the first year, you can take the tax benefit of ₹10,000.

Now let’s assume this is how the NAV changes over the next few years:

For the first 3 years, your investment is locked in. But if you sell your investment in the 4th year, your profit will be ₹4,500 (₹14,500 - ₹10,000). Your long-term capital gains will be tax-exempt.

However, you must remember that the fund’s NAV can also fall at any time, reducing your investment value.

Here are the primary benefits of ELSS mutual funds:

• Tax deduction under Section 80C: If eligible under the old tax regime, you can claim a deduction of up to ₹1.5 lakh under Sec 80C. Remember, this is a combined limit, not separate for ELSS.
• Shorter lock-in period: Compared to other tax-saving instruments like tax-saving FDs, which have a 5-year lock-in period, ELSS has only a 3-year lock-in.
• Potential for long-term wealth creation: Since ELSS invests mainly in the equity market, it can offer higher growth potential than traditional fixed-income tax-saving products over the long term.
• Can invest in small instalments: With the SIP option, you can invest in ELSS funds in small parts instead of the entire amount at once. This can make it easier to spread your purchases across different market conditions.

You should be aware of the following risks associated with ELSS funds:

• Market risk: ELSS funds invest mainly in equities, so their NAV can fall when the stock market declines. Your investment may be worth less than what you initially invested, especially over a short term.
• 3-year lock-in period: You cannot redeem your ELSS units before their individual 3-year lock-in ends. This means you should not invest money that you may need for an emergency. For that, you can choose schemes like liquid funds or short duration funds.
• Tax benefits depend on the tax regime: Section 80C benefits are available only under the old tax regime. If you use the new tax regime, you cannot claim this deduction.
• No guaranteed returns: ELSS does not promise a fixed rate of return like a bank FD. Your returns depend on the performance of the fund’s investments.

How can you handle these risks?

Here are a few things you can do to manage some of the risks:

• Check your tax regime: Make sure you actually use Section 80C deduction before investing in these funds.
• Invest for the long term: Once invested, you cannot redeem for 3 years. Make sure you don’t invest emergency funds into ELSS.
• Use SIPs: Investing regularly can help in averaging the purchase costs.
• Diversify: Invest across other asset classes to balance the risk and have enough liquidity.

If you are comparing tax-saving options, here’s a simple way to look at them:

If you want equity exposure without the ELSS lock-in, you can also explore flexi cap funds, large cap funds or index funds.

Don’t look for the best ELSS mutual funds based on returns. Instead, check:

• Long-term performance: Look at the fund’s performance over several years and compare it with its benchmark and other funds in the same category.
• Scheme’s investment approach: Understand who manages the fund and how they select stocks. A consistent investment approach is more useful than chasing recent performance.
• Portfolio: Check the fund’s portfolio to identify major holdings and sector allocation. Make sure the portfolio fits your risk-taking capacity.
• Risk and consistency: Look at how the fund behaved during the past market corrections as well as strong markets. A fund that performs well only in a bull market may not be the right choice.
• Expense ratio: The expense ratio is the cost the fund charges to manage your money. Compare this when evaluating different schemes.
• Direct vs regular plan: Direct plans generally have a lower expense ratio as they don’t include distributor commission. Prefer direct plans over regular plans.

For long-term investing, you can also compare growth and IDCW options based on your needs. Growth plans keep gains invested in the fund, whereas IDCW plans pay out the profits and dividends.

You can start investing in ELSS mutual funds with Millions in a few simple steps:

• Download the Millions app from the Google Play Store or iOS App Store.
• Verify your mobile number, complete KYC and set up your free account.
• Go to the mutual funds section and find the ELSS fund of your choice.
• Click SIP and select your investment frequency (daily, weekly, or monthly).
• Enter the amount, select the debit date and authenticate the payment.

And that’s all! You can start with a small SIP initially and increase the amount later as your savings grow. However, before investing in an ELSS fund, check whether the Section 80 benefit applies to you and make sure you are comfortable with the 3-year lock-in. If not, you can explore other equity, debt, hybrid, and index funds.