Did you know these 5 rules that apply only to ELSS Mutual Funds?

Here are five interesting rules and lesser-known facts that apply only to ELSS (tax saving) mutual funds!

/ M. Pattabiraman / @pattufreefincal

Published: January 20, 2020 at 11:54 am

Equity Linked Savings Scheme (ELSS) or tax-saving funds refers to a class of mutual funds in which an investment up to Rs. 1.5 Lakh a financial year can be used for reducing our taxable income. In exchange, each unit is locked for three years. Here are some other lesser-known facts about ELSS mutual funds (the references are given below).

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1. The finance ministry and not SEBI stipulate ELSS fund rules

Unlike all other mutual funds, where and how an ELSS fund can invest its money, is decided by the finance ministry and not SEBI For example, the minimum investment is Rs. 500 and any investment has to be in multiples of Rs. 500. This minimum investment amount (non-SIP) in other fund is typically higher.

2. ELSS funds only need to be open for subscription for three months in any FY.

This means they can close after that! This also means we can have both closed-ended and open-ended ELSS schemes.

3. Upon the death of the unitholder, nominees cannot get the money immediately!

If the unitholder dies, the nominee or heir shall obtain the units or corresponding value only after one year from the date of allotment of each unit. If the unitholder is running a SIP and the nominee does not inform the AMC to stop it, this rule would still apply!

4. ELSS funds can only invest in equities and bonds that are convertible to shares. Arbitrage is not allowed.

5. At all times, 80% of an ELSS fund’s portfolio should be direct Indian Equity.

It can hold 20% in cash or money market instruments to handle redemptions. The 80% equity can be managed as per the wishes of the AMC. They can be large-cap, multi-cap or mid-cap funds. Most funds are typically large-cap oriented. See for example Mirae Asset Tax Saver Fund vs Axis Long Term Equity Fund

6. Only one open-ended ELSS fund with SEBI approval is allowed per AMC.

Although this rule was in existence since the launch of ELSS funds, before the SEBI categorisation rules, Birla AMC has three ELSS funds! Edelweiss and L&T two each from acquisitions! An AMC can have any number of closed-ended ELSS funds!

References

GOI Gazette notifications 3rd Nov 2005 and 13th Dec 2005.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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