Equity Linked Savings Scheme: Get dual benefit of tax saving & wealth creation

Equity Linked Savings Schemes are a type of diversified equity mutual fund schemes, which invest a major proportion of investors’ capital in equity. This is the only mutual fund scheme that offers income tax benefits under section 80C, up to the limit of Rs 1.5 lakh.  

ELSS provides you with the dual benefits of wealth creation as well as tax benefits. This is the only Section 80C investment, which has a lower lock in period of 3 years as compared to other Section 80C investments like PPF, NPS etc.  

What you should know before investing?  

Diversification: As the name suggests, these funds invest a major chunk i.e. 80 per cent of the total assets in equity. They diversify the corpus by investing in various companies across the different sectors of the economy and deliver optimal returns.  

Investment horizon: ELSS funds have a lock-in period of 3 years; so, it’s mandatory to be invested for at least 3 years but you can remain invested even for a longer period of time. It is actually recommended to invest your capital in this fund for a longer period of time as these funds’ returns are dependent on the market, which is volatile in nature. You may not receive the desired returns in a 3-year time period as there are chances of incurring losses. So, it’s better to invest for a longer period like 5-7 years.  

Risk profile: ELSS fund have the potential to offer higher returns but it also, comes along with risk. As these funds invest in equity, the risk is quite higher as compared to other tax-saving schemes. Anyone who chooses to invest in these schemes should assess their risk appetite and proceed further to invest. As there is volatility in the market, these funds become riskier to invest in. You shouldn’t invest just for tax-saving opportunities. 

Mode of investment: You can invest via SIP as well as a lump sum. Most preferably, SIP is chosen as it gives the option to invest in small amounts and also, offers the benefit of rupee cost averaging. Investing a lump sum amount can be risky if you invest during a bullish market. Nevertheless, you can invest a lump sum when the market is bearish. The minimum amount of investment with which you can start your SIP in ELSS is Rs 500 and there is no capping for maximum investment.  

Tax benefit: Tax benefits are the most attractive aspect of these funds. You get tax benefit u/s 80C of Income Tax Act, 1961 up to Rs 1.5 lakh.  

Comparison of ELSS with other tax-saving schemes:  

There are other tax-saving schemes also such as PPF, NPS, etc. Out of which, ELSS has the lowest lock-in period i.e. 3 years whereas PPF has a lock-in period of 15 years and NPS has a lock-in period till retirement.  

Let’s calculate what will be your returns after 3 years if you invest Rs 1,00,000 every year in ELSS, PPF or NPS:  

The average rate of return – ELSS: 13.5 per cent 

The average rate of return – PPF: 7 per cent 

The average rate of return – NPS (Tier 1): 9 per cent 

The following graph depicts the returns from every investment scheme after 3 years: