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Tax Saving Mutual Funds

Invest in the best tax saving funds recommended by Scripbox that are algorithmically selected that best suit your needs

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We use a proprietary system to rate mutual funds and based on that make a recommendation or rate the fund as top ranked.

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Scripbox algorithm recommends 2-4 funds for investment for an investment asset class such as large cap, diversified, liquid etc. When you invest for an objective, the algorithm suggests the appropriate asset class and funds.
Track Record

Track Record

We look at consistent and long historical performance for our analysis.

Fund Size

Fund Size

We look at the size of the fund with respect to other funds in the category. Larger funds are preferred.

Sub-asset Class View

Sub-asset Class View

We check if the sub-category of the fund is recommended by us.

Fund Performance

Fund Performance

Consistency of performance over various tenures is analysed for a relative performance stack.

Track Record

Track Record

We look at consistent and long historical performance for our analysis.

Fund Size

Fund Size

We look at the size of the fund with respect to other funds in the category. Larger funds are preferred.

Impact of Interest Rates

Impact of Interest Rates

We check the relative interest rate risk of the sub-category of the fund. Lower the better.

Credit Attractiveness

Credit Attractiveness

We check the credit quality of the underlying instruments present in the fund. Higher the better.

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What are Tax Saving Mutual Funds?

Tax saving mutual funds, also known as Equity Linked Saving Schemes (ELSS funds), are open-ended equity funds that invest at least 80% of the total assets in equity and equity-related instruments. These mutual funds come under Section 80C investments and offer a tax benefit to investors. Investments up to INR 1.5 lakhs in these funds qualify for tax deduction under Section 80C of the Income Tax Act, 1961, and this will help investors save up to INR 46,800 in taxes.

The minimum investment in ELSS funds is usually around INR 500 through SIP and lump-sum routes. These funds have a mandatory lock-in period of 3 years, after which they can be redeemed. Since they majorly invest in equity instruments, it is advised that investors stay invested for a minimum of 5 years to reap the best returns.

ELSS funds have historically performed well in the long term. Hence, investors are advised to stay invested for longer tenures to unleash the potential of these funds with the help of the power of compounding. At the same time, they can also enjoy the tax benefits that these funds offer.

Advantages of Investing in Tax Saving Mutual Funds

Following are the advantages of investing in Tax Savings Mutual Funds:

Tax Benefit

Tax saving mutual funds offer a tax benefit for investors. Investors can claim tax exemption on their investments up to INR 1,50,000 under Section 80C of the Income Tax Act, 1961, for a financial year. However, tax saving mutual funds investments have a lock-in period of three years. Also, there is no restriction on how much one can invest in tax saving mutual funds. However, the exemption cannot be claimed on an amount beyond INR 1,50,000.

Mode of Investment

Tax saving mutual funds accept two types of investments: SIP or Lumpsum. If an individual has a surplus amount available for investment, then they can consider investing through the lump sum route. However, if an individual wishes to invest small amounts regularly can do so through SIP investments.


There is a three years lock-in period for tax saving mutual funds. This lock-in period is the lowest in comparison to other tax-saving investments under Section 80C of the Income Tax Act, 1961. Furthermore, with tax saving mutual funds, partial withdrawals or lump-sum withdrawals can be made after the lock-in period. Also, the lock-in period evens out the volatility associated with equity investments.


Like all mutual funds, tax saving mutual funds also disclose all the information related to the scheme regularly. Therefore, investors can track the mutual fund portfolio, its performance, and market value from time to time.

High Returns

Top tax saving mutual funds (ELSS) have the potential to earn higher returns in comparison to the other tax-saving investments such as PPF or NPS. The probable high returns are the result of equity exposure in the mutual fund portfolio.

Professional Management

Professional fund managers manage ELSS funds. As a result, even if an investor has little or no market understanding, they can invest in the best ELSS mutual funds. Such professional management helps investors in maximising their returns.

Limitations of Investing in Tax Saving Mutual Funds

Lock-in Period

ELSS mutual funds have a lock-in period of three years. However, it is important to note that this lock-in period is the least in comparison to other tax saving options. For example, PPF investments also qualify for tax exemption under Section 80C of the Income Tax Act, 1961. However, the investments have a lock-in period of 15 years. Therefore, ELSS mutual funds are the only investment options with the lowest lock-in period that qualify for tax exemption.

High volatility

ELSS mutual funds are highly volatile investment options. In other words, ELSS funds invest at least 80% of their assets in equity or equity-related instruments. Hence, it is important to be cautious while selecting the funds for investments. However, the lock-in period helps in evening out the high volatility associated with ELSS investments.

Who should Invest in Tax Saving Mutual Funds?

ELSS funds best suit investors who want to save tax and also invest for a long-term horizon. However, these funds come with a lock-in period of 3 years and hence suitable only for investors who want to stay invested during the mandatory lock-in period of 3 years.

Since these funds majorly invest in equities, the minimum investment horizon for these funds should be five years. Hence investors who have long term goals can invest in these funds. Moreover, young investors in the initial years of their career can also invest in these funds to take advantage of equities and long-term investment horizons.

Things To Consider Before Investing in Tax Saving Mutual Funds

Investment Goals

Mutual funds are among the best investment options that enable goal-based investing. In other words, investors who wish to invest for tax-saving purposes can opt for ELSS mutual funds. Therefore, it is important to ensure that the investment goals are aligned with the fund’s investment objective.

Investment Duration

ELSS mutual fund investments come with a three year lock-in period. Therefore, before investing in an ELSS fund, it is important to consider the lock-in duration. Also, the fund doesn’t allow premature withdrawals during the three year lock-in period. Since ELSS funds invest most of their assets in equity or equity-related instruments, the lock-in period evens out the volatility of the fund. 

Returns and performance of the fund

Unlike most traditional tax saving schemes, mutual funds do not guarantee returns. However, the fund’s historical performance helps in understanding the performance of the fund over different market scenarios. The consistency in the fund’s performance can be a promising factor. Also, it is important to compare the returns from the fund with its benchmark. Though historical returns do not guarantee future returns, they can be a good indicator while shortlisting a fund.


ELSS mutual funds invest primarily across equity and equity-related instruments. Therefore, these funds are prone to high volatility. Hence, it is important to analyse the portfolio exposure of a fund before investing in them.

Lock-in Period

There is a mandatory lock-in period of 3 years for ELSS funds. Also, there is no provision for premature withdrawals during this period. Hence investors willing to invest in these funds must stay invested for three years from the date of investment. In the case of lump sum investment, the entire investment can be withdrawn after three years of lock-in. However, in the case of SIP, each SIP is considered as a separate investment, and each needs to complete a lock-in of 3 years before it becomes eligible for withdrawal.

Financial Ratios

Several financial ratios help in evaluating ELSS mutual funds. However, the following are a few of the key financial ratios that help in evaluating any mutual fund:


Alpha measures the performance of a mutual fund against its benchmark. In other words, it is the excess return of a fund when compared to the benchmark. A positive alpha indicates that the ELSS fund has better returns than its benchmark.

Standard Deviation

Standard deviation measures the volatility of a fund’s return from its average return. In other words, it measures the risk in the fund’s return. A high standard deviation indicates more volatility of returns and hence high risk.


Beta is a measure of the sensitivity of an ELSS fund to stock market movements. In other words, it measures the volatility of a mutual fund portfolio to the market movements. If the beta is more than one, it shows that the ELSS fund is highly sensitive to market movements. Whereas, if the beta is less than one, it shows that the ELSS fund is less sensitive to market movements. Also, if the beta equals one, it shows that the ELSS fund is in tandem with the market.

Portfolio Turnover Ratio

It denotes the number of times the ELSS fund’s portfolio has been churned in a year. In other words, it is the number of times the fund manager has changed the fund’s portfolio in a year. A high portfolio turnover ratio indicates higher expenses in the form of transaction costs and sometimes also capital gains tax.

Sharpe Ratio

The Sharp ratio measures the excess return from a mutual fund for every additional unit of risk taken. In other words, it measures the risk-adjusted return from an ELSS fund. A high Sharpe ratio indicates that the ELSS fund has better risk-adjusted performance.


R-squared is a statistical measure that determines the ELSS fund’s similarity to its benchmark. In other words, r-squared shows how similar the portfolio of an ELSS fund to the benchmark. A high R-squared shows high similarity with the benchmark, giving investors an opportunity to compare the returns and portfolio.

Cost of ELSS Funds

ELSS mutual funds come with a cost, and it is called the expense ratio. Though SEBI has capped the expense ratio at 2.5%, the investors have to bear these costs. The NAV that is published every day by the fund houses is after accounting for the expense ratio. Hence, investors have to compare different ELSS funds based on returns after expense ratio and choose the one with the highest return and lowest expense.

Taxation of ELSS Funds

Though investment in ELSS funds qualifies for tax deduction under Section 80C of the Income Tax Act, 1961, the returns are taxable. Since these funds majorly invest in equities, they are treated as equity mutual funds for the purpose of taxation. Also, since they have a lock-in of 3 years, the short-term capital gains are not applicable to them. However, they qualify for long term capital gains. All long-term capital gains above INR 1 lakh are taxable at 10%. Hence investors have to consider the taxability of the returns before investing in them.

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