A large number of people are familiar with ELSS funds. ELSS funds stand for Equity Linked Savings Scheme. ELSS are specialised forms of mutual funds that deal in equity instruments and ensures different tax benefits on both dividends and capital gains earned by an investor. Other than ensuring the tax benefits to the investors, the ELSS also offers the advantage of capital appreciation. The ELSS comes with two investment options: Growth and Dividend. These are also a great option to opt for to meet your long-term financial goals.
The ELSS schemes mainly invest in all kinds of equity instruments and the performance provided is market-linked.To maximise returns, a combination of large-cap, mid-cap and small-cap companies are chosen. However, the choice of companies depends upon the portfolio manager.
More and more people can be seen opting the ELSS scheme than other 80C instruments owing to a number of benefits associated with it. Some of the benefits listed below will help you know more about ELSS and aid you to decide whether it is worth investing or not.
Here are the Major Benefits of ELSS Funds.
Helps Save Tax
Substantial tax benefit is the primary advantage associated with ELSS Funds. Under Section 80C of the Income Tax Act, 1961, a deduction of Rs. 1.5lakh from total income tax can be availed by investing in ELSS funds. While calculating the amount to be deducted from the income tax, factors such as dividend distribution tax and gains from capital appreciation are also taken into account.
However, one should note that long term capital gains that are earned from the ELSS mutual funds are accountable to deduct taxes at the rate of 10% without any indexation.
Low Lock-in Period
Keeping in mind the performance of mutual funds, the ones who offer good returns are generally long term investments. However, there are no such lock-in periods associated with these.
An ELSS comes with a three-year lock-in period, which implies that the units cannot be redeemed or switched before the completion of three years. Though it might seem a negative aspect, the three-year lock-in period instils a good habit in the individuals to stay invested for a longer period. Moreover, compared to other investment instruments included under section 80C, the ELSS has a shorter lock-in period.
Higher Returns
The total returns obtained from ELSS schemes is comparatively higher than all other equivalent investment tools, such as tax-saving fixed deposits, NSC (National Savings Certificates) and PPF (Public Provident Funds). Since the ELSS mutual funds are equity-oriented, the returns are considerably high as compared to fixed income instruments.
Moreover, the dividends that you earn from the ELSS scheme can be redeemed or reinvested into various mutual funds. However, it should be noted that any amount reinvested in the ELSS gets locked for a tenure of three years.
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Multiple Investment Methods
Individuals can invest in ELSS in lump-sum amounts, or through SIPs (Systematic Investment Plans). It is completely upon the discretion of the investor. This serves as an attractive feature of the ELSS among all groups of investors, as it lets individuals with less funds to make profits in the stock market. Investors can opt for the SIP method with a minimum amount of Rs. 500. With an investment as low as this, you can invest without having to gather reasonable assets.
Investing via the SIP method also ensures the investors Rupee Cost Averaging of the total amount, therefore, allows them to ensure maximum returns through capital appreciation. By this method, one can invest in promising shares when their value is low while engaging lower amounts when the shares are costly. Moreover, as the mutual funds are subject to compound interest, the total value earned during the redemption also increases.
The ELSS scheme can be a good investment option if you are new to investment but want to save on your taxes. This scheme is also considered a better investment option as they are managed by fund advisors who are experts in their fields.
However, before you invest in ELSS Funds, you should note that risk factor associated with these mutual funds are relatively higher than its equivalent counterparts like PPF and NSC because it deals with equity instruments. Therefore, you can invest in an ELSS Fund only if you are risk-taking by nature. These funds can be volatile in the short term but they have the capacity to give a superior return in the long term. With the liquidity exposure and healthier wealth scopes, in the long run, individuals with more risk tolerance can opt for the ELSS scheme.
