All You Need To Know About ELSS

All You Need To Know About ELSS

When it comes to making tax-saving investments, investors have a plethora of options to select from. One such option is the equity-linked saving scheme popularly known as ELSS or tax-saving mutual fund. This type of mutual fund typically tends to be a diversified, open-ended equity fund which comes with a three-year lock-in period. So, apart from wealth creation, one can also enjoy tax benefits under Section 80 C of the Income Tax Act, 1961. Since ELSS is covered under the Section 80 C provisions, you can claim tax deductions of up to ₹ 1,50,000 a year. Any amount above ₹ 1,50,000 a year will not be considered under Section 80 C provision. 

The striking feature of ELSS is that it has the shortest lock-in period when compared to other investment options like PPF, NSC, etc. As a result, ELSS tends to be more liquid and accessible as compared to any other Section 80 C investment option. Also, ELSS is the only Section 80 C investment option which has the potential to offer inflation-beating returns. This is what makes ELSS stand out among all tax-saving investment options. Given the nature of the fund, ELSS can be considered as a stepping stone into equity investing for investors who are new to equity investing. 

However, one needs to bear in mind that such investments are geared for the long term in order to reap the benefits of compounding. As compared to other funds, the fund manager of an ELSS scheme is better positioned to take comprehensive bets due to the three-year lock-in period. This results in higher return on investment for the investors over a period of time. Historically, ELSS funds are known to deliver average returns of around 10-15 per cent over a period of more than five years. As a means to make this offering accessible to one and all, fund houses today allow investors to invest as low as ₹ 500 in an ELSS scheme.

Investors can choose between lump sum and SIP mode of investment. Since ELSS is an equity offering, it is advisable to opt for SIP as it allows investors to spread their investment throughout the year, thereby reducing the risk to capital while being disciplined about one’s investment. In terms of the risks associated, since ELSS is an equity mutual fund there is always a market-linked risk. Just like any other equity mutual fund, over short term the investment experience could be volatile but over long term the experience tends to even out. Hence, if you are investing in ELSS, make it a part of long-term holdings in your portfolio.

Choosing the Right Fund While initiating any investment, your investment objective, risk profile and investment horizon need to be the starting point before considering any scheme to invest into. Since ELSS investment is long term in nature, look for funds which are consistent in terms of the fund performance. Check how the fund manager has been able to navigate the portfolio in various market conditions. This will provide a fair idea on portfolio resilience. While at this exercise, do not make an investment decision based on one-year fund performance data. This is because for a long term investment like ELSS, making a decision based on near past data provides a wrong picture. Investors across the tax bracket, more importantly those in the higher tax bracket, may invest in these funds to save taxes.

This is because the long-term capital gain of up to ₹ 1 lakh is tax-free. Moreover, gains exceeding ₹ 1 lakh are taxed at the rate of 10 per cent without the benefit of indexation. This makes the ELSS option a very tax-efficient investment option. To conclude, investors in ELSS can enjoy the dual benefits of capital appreciation from investments in equity along with tax saving. As the financial year draws to an end, if you are seeking a good tax-saving investment option, ELSS is an interesting alternative to consider. An investor can also use this fund to meet long-term financial goals like child’s education, marriage and retirement. More than fund selection, what is of paramount importance is remaining invested for the long haul. Last but the least, when in doubt, consult a financial advisor.

The writer is Owner, Shah Financial Services
Email: mitalshah222@yahoo.com

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