Tax Saving Mutual Funds, is known as ELSS (Equity Linked Savings Scheme), are financial products that allow investors to save tax while investing in the stock market. These funds qualify for tax deduction under Section 80C, Income Tax Act, 1961.
When you invest in an ELSS fund, the amount you invest (up to ₹1.5 lakh in a financial year) can be deducted from your taxable income. This reduces the tax you need to pay. However, after the latest amendments introduced by the Union Budget 2025, the ELSS scheme tax benefit can be availed of only when you file your Income Tax Return (ITR) under the old regime.
So, are you looking to invest? Read this article to learn what ELSS mutual funds are and how you can pick the right scheme as per your risk tolerance.
Table of Content
What are ELSS Mutual Funds?
As per SEBI rules, an equity-linked savings scheme must invest at least 80% of its total assets in equity and equity-related instruments [in accordance with the provisions of the Equity Linked Saving Scheme (ELSS), 2005, notified by the Ministry of Finance].
The remaining (up to 20%) of the fund’s assets may be invested in other instruments such as debt or money market instruments, depending on the fund manager’s strategy.
The Mandatory Lock-in Period and Tax Benefit
Every investment made in an ELSS fund has a statutory lock-in period of three years. This means each investment amount must stay invested for three years before it can be redeemed. After the three-year lock-in, any profit you make is treated as Long Term Capital Gain (LTCG). If the total gain in a year is more than ₹1.25 lakh, it is taxed at 12.5% + cess.
Furthermore, all the investments made in an ELSS fund qualify for tax deduction under Section 80C, subject to the overall limit of ₹1.5 lakh under old tax regime.
How to Can You Pick the Right ELSS Mutual Fund in 2026? The 4-Step Approach!
The selection of the right ELSS tax saver fund depends on aligning the:
Fund’s risk level
Portfolio structure, and
Investment style with your own “risk tolerance.”
That’s because not all ELSS funds behave the same way (even though they follow the same tax rules). Each fund differs in terms of portfolio construction, market-cap exposure, and level of volatility.
Let’s see how you can make a disciplined selection based on your risk profile following this four-step approach:
Step 1: Understand Your Risk Profile
Your risk profile reflects how much market fluctuation you can tolerate and how long you can stay invested. Generally, investors are divided into these three types (check where you belong):
| Type of Investor | Investment Approach |
| Conservative Investor | You prefer stability and are uncomfortable with sharp market declines. |
| Moderate Investor | You can tolerate some volatility and are willing to accept short-term losses (in search of potential long-term wealth creation). |
| Aggressive Investor | You can handle high volatility and remain invested even during market corrections. |
Always remember that since ELSS funds invest at least 80% in equities, they are very high risk products. If you find yourself a conservative investor, you may approach ELSS carefully or instead prefer other tax-saving products.
Step 2: Match ELSS Fund Style With Your Risk Profile
Once you understand your risk profile, the next step is to translate that self-assessment into “actual fund selection”. As an investor, you may try to match the style of an ELSS fund with your risk profile.
This matching is important because ELSS investments cannot be withdrawn for three years, so the fund you choose should suit both your risk tolerance and your time horizon.
Step 3: Evaluate the Fund’s Track Record
When selecting an ELSS fund, you may not judge it only by its “recent performance”. Reason? Short-term returns can be influenced by temporary market conditions and may not reflect the fund’s true quality.
Therefore, you may also make the following checks:
| What to Check | How to Check | Importance |
| Performance Over 5 to 10 Years | Review how the fund has performed over a long period (not just recently). | Shows how the fund has handled different market phases (including bull and bear markets).
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| Behaviour During Market Downturns | Check how much the fund fell during market corrections and how it recovered. | You may understand the level of risk and whether the fund can manage losses during weak markets.
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| Comparison with Benchmark | Compare the fund’s returns with its benchmark index. | Indicates whether the fund manager has underperformed or overperformed the benchmark.
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| Comparison with “Category Average” | Compare the fund’s performance with other ELSS funds. | Lets you identify whether the fund performs consistently better than its peers.
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Step 4: Review the Fund Manager and Risk Metrics
The fund manager is the person responsible for deciding which stocks the ELSS fund invests in. Their experience + track record are highly important. A skilled manager is more likely to make better investment decisions, particularly during volatile markets.
Next, while evaluating an ELSS fund, try to understand how much risk you are taking. This assessment can be done by looking at the following four metrics:
| Risk Metrics To Check | Explanation |
| Standard Deviation |
|
| Downside Capture Ratio |
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| Sharpe Ratio |
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| Beta |
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Understanding Long-Term and Short-Term Capital Gains Tax on Mutual Funds
Conclusion
Till now, you must have understood that ELSS is a tax-saving option with a mandatory 3-year lock-in period. Investments made in this fund are eligible for deduction under Section 80C up to ₹1.5 lakh under the old regime.
However, since all ELSS funds differ in terms of risk profiles + portfolio composition, it is important to match a fund’s risk with your own risk tolerance before committing your money. This can be done by:
Reviewing long-term fund performance history
Checking fund behaviour during market corrections
Understanding the fund manager’s strategy
Evaluating volatility using the Sharpe ratio and Beta
Comparing returns with the “benchmark” and “category average.”
Disclaimer:
The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
