Simply put, ELSS (EQUITY LINKED SAVING SCHEME) is a type of diversified equity mutual fund, which qualifies for tax exemption under Section 80C of the Income Tax Act.
ELSS stands for Equity Linked Savings Scheme. It works like any other open-ended equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation (dividends) for investors.
A distinguishing feature about ELSS is that they are subject to a compulsory lock-in period of 3 years, but the minimum application amount in most of them is as little as Rs 500, with no upper limit. In ELSS, you can make either lump sum investments or investments through a Systematic Investment Plan (SIP). In case of the latter, each installment has a 3-year lock-in period.
And if you ask, who can invest in ELSS? Individuals and HUFs can invest in ELSS. It is noteworthy that, in the long-term if you intend to create wealth, then this tax saving funds has potential to give you luring inflation-adjusted returns.
You may say – “but there is risk involved”. Well, no doubt about that; but in order to even out the shocks of volatility in the equity markets you can adopt the SIP SYSTEMATIC INVESTMENT PLAN route of investing here which will provide you the advantage of “compounding” along with “rupee-cost averaging”.
SIPs in ELSS can help you tackle volatility and may help you gradually create wealth in the long run.
While considering an ELSS mutual fund for your market-linked tax-saving portfolio, give importance to those ELSS mutual funds that have completed at least 3 years of track record and select schemes from mutual fund houses which follow strong investment systems and processes.
Don’t get lured just by returns clocked because there’s more to evaluating a mutual fund scheme than just returns. Moreover, past performance does not guarantee that the fund will continue to fare in the same manner in the future. Hence look for a fund with a consistent performance track record besides qualitative aspect like fund house pedigree, investment process, quality of fund management team, among others.
#2: Why ELSS Funds
For those who still want to know more why they should invest in ELSS Mutual Funds, here is a list of merits you cannot ignore.
- Lowest Lock-in Period
This is what makes ELSS better than all other investment options.
While your tax saving investments in PPF is locked in for 15 years, NSC for 6 years and tax saving bank fixed deposits for 5 years, your investments in ELSS is locked in for just 3 years. So, if you are looking for tax benefits along with higher return potential, but do not want to commit your money for very long period of 5 to 15 years, ELSS is something you should look for.
- Tax Efficient
When compared with any other diversified equity mutual fund, the taxation on the gains are the same.
So, what makes ELSS differ from any other diversified mutual fund? You can invest up to Rs 1.5 lakh in an ELSS and get that as a tax deduction under Section 80C in a financial year.
Mind you, you cannot get that from any equity mutual fund.
And when compared to other popular tax saving instruments such as Tax Saving Fixed Deposits or PPF, ELSS is definitely better.
Not only does an ELSS reap higher returns, long-term gains from an ELSS is absolutely tax free just like that of PPF.
But what about Tax Saving Fixed Deposits? My elders always saved tax there?
Well, the answer is you can also park your money in FDs, but you may earn lesser returns on your investments. Plus, the returns earned on fixed deposits are taxable too.
- Long Term Wealth Creation
Like other equity mutual fund schemes, these mutual funds too are optimized for highest returns possible.
You can depend on the best ELSS to potentially grow your money in a matter of 3 to 5 years (considering the market is favourable, of course).
BENEFITS OF ELSS…
1. Efficient Fund Management
Unlike in a term deposit or a NSC, where you put your money in, and the issuer just lends it out, while paying you a nominal return; a mutual fund is geared to grow your investment in a much more efficient way.
Because a mutual fund is expected to be managed by professional fund managers. They invest with an aim to make higher gains for their investors.
Agreed, investing in a mutual fund is risky per se. But if you invest in the RIGHT mutual fund, you would reap much higher gain than you can probably expect from a fixed deposit, PPF account or savings certificate.
And the reason behind it is, perhaps the long-term experience and market knowledge of the fund managers working to grow your money day in and day out.
In other words, if you are looking to grow your investment, in a shorter time compared to other tax-saving instruments and that also, not paying the government any share of it.
2. Option to Monthly SIP
The best approach to sail the tides of market volatility, is to opt for Systematic Investment Plans (SIPs), a mode investing in mutual fund schemes offered by mutual fund houses.
You need not wait till the last quarter of the year to make a lump-sum investment in ELSS.
3. Low Cost Entry Point
As mentioned above, you can invest in ELSS funds with investments as low as Rs 1000 via SIP route. Hence, you no longer can give an excuse that I cannot afford to invest in ELSS.
Unlike PPF contributions, there is no maximum limit on your investments in ELSS. However, tax benefits can be availed only for investments made upto Rs 1.5 lakh.
These benefits make it more desirable for investors looking to invest in ELSS with an objective of tax saving along with long term wealth creation.
Well, a lot of factors need to be considered over here.
ELSS is a market linked security and returns on your ELSS funds depend on the performance of stock market at large and other fund specific characteristics.
PPF on the other hand is a Government backed, long-term small savings scheme. For years PPF has been most favourite instruments by Indian Citizens.
But keep in mind your liquidity needs, because under PPF account your money is blocked for good 15 years.
So, if you are keen on a safe corpus, earning a decent tax-free rate of return, enjoying tax benefit; then PPF is for you. The contributions (i.e. investments) made to the PPF account, will earn a tax-free interest and the maturity proceeds are exempt from income-tax. Further, the contributions made into PPF account are yours for keeping – it cannot be attached by the order of a court to any debt or liability you may have.
ELSS is now subject to LTCG.
consult your financial advisor or CA before investing.
Courtesy – personalfmdotcom