ELSS in Mutual Fund, or Equity Linked Savings Schemes, are mutual funds that primarily invest in equity and equity-related instruments. They are known for their potential to generate high returns over the long term while offering tax benefits under Section 80C of the Income Tax Act.
Equity Linked Savings Scheme (ELSS) is a type of mutual fund designed to help individuals save taxes while also creating wealth through equity investments.
How does ELSS in Mutual Funds Work?
Equity Linked Savings Scheme (ELSS) mutual funds work by pooling investments from multiple investors to invest in equity and equity-related instruments. These funds are designed to generate long-term capital growth while offering tax benefits under Section 80C of the Income Tax Act.
1. Investment in Equities
ELSS funds allocate at least 80% of their portfolio to equities across various sectors and market capitalizations. This exposure to equities helps provide the potential for high returns, though it also involves market-related risks.
2. Tax benefits
Investments of up to ₹1.5 lakh in ELSS per financial year are eligible for tax deductions under Section 80C. This helps in reducing taxable income, making ELSS an attractive option for tax planning.
3. Mandatory Lock-in Period
All investments in ELSS have a mandatory lock-in period of three years. This means investors cannot redeem their units before the three years are over, ensuring disciplined and long-term investment.
4. Modes of Investment
Lump Sum: A one-time investment where you invest a large amount in one go.
Systematic Investment Plan (SIP): Smaller, periodic investments spread over time, which helps in averaging the cost of acquisition during market fluctuations.
5. Post Lock-in period Flexibility
After the lock-in period, investors can choose to redeem their units or stay invested for further growth. ELSS does not mandate withdrawal after the lock-in ends.
Benefits of Investing in ELSS Mutual Funds
Equity Linked Savings Schemes (ELSS) offer a unique blend of tax-saving benefits and wealth-creation opportunities, making them an attractive investment choice. Here’s a breakdown of their key benefits:
1. Tax Savings
ELSS investments are eligible for deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per year. This reduces your taxable income, offering significant tax relief.
2. Shortest Lock-in period
Among all tax-saving instruments, ELSS has the shortest mandatory lock-in period of just three years, compared to Public Provident Fund (PPF) or National Savings Certificate (NSC), which require 5-15 years.
3. Chances for higher returns
Since ELSS funds primarily invest in equity markets, they have the potential to deliver higher returns compared to traditional tax-saving options like fixed deposits or PPF. Over the long term, they can outpace inflation effectively.
4. Systematic Investment option
Investors can choose between a lump sum investment or start a Systematic Investment Plan (SIP), making it convenient to invest small amounts regularly while benefiting from rupee cost averaging.
5. Flexibility and Accessibility
Minimum investment starts as low as ₹500.
Post-lock-in, investors have the flexibility to redeem funds or stay invested for compounding growth.
6. No maximum Investment limit
While tax benefits apply up to ₹1.5 lakh, there is no upper cap on the investment amount, allowing for more extensive wealth-building opportunities.
Who Should Invest in the ELSS Fund?
1. Individuals looking to save taxes
ELSS is ideal for taxpayers who want to save on income tax under Section 80C. With a deduction limit of ₹1.5 lakh, ELSS allows individuals to reduce their taxable income while investing in equity markets.
2. Long term investors
ELSS has a lock-in period of three years, making it suitable for those who can commit to a medium to long-term horizon. Staying invested even beyond the lock-in period can lead to compounding benefits.
3. First-time equity investors
For those new to equity markets, ELSS provides an opportunity to enter with a professionally managed fund, diversifying risks while potentially earning good returns.
4. Young Professionals
Young earners want to start investing at their earliest, so they can resume with ELSS, leveraging the benefits of compounding over time. Starting with small investments through SIP also makes it easier to manage finances.
5. Investors looking for flexibility
Compared to other tax-saving instruments, ELSS offers flexibility. After the lock-in, investors can redeem or continue staying invested without restrictions.
Who Should Avoid ELSS?
Those with a very low-risk appetite may prefer safer options like PPF or tax-saving fixed deposits.
Investors needing liquidity within three years should avoid ELSS due to its lock-in period.
Methods to invest in ELSS Mutual funds:-
1. Investing directly through the fund house
Online Portal: Visit the website of the mutual fund house offering the ELSS scheme.
Complete the registration process.
Submit KYC details (PAN, Aadhaar, etc.).
Select the desired ELSS fund and make the payment.
Offline Mode: Visit the nearest branch of the fund house, fill out an application form, and provide the required documents and a cheque for the investment.
2. Using Demat Account Platforms
Many investors prefer investing in ELSS through their existing Demat account or trading platforms. This allows easy management of all investments in one place.
3. Third-party Online platforms
Various platforms like Groww, Zerodha Coin, ET Money, and others facilitate investments in ELSS funds. They provide:
A user-friendly interface.
Fund comparisons and insights.
SIP or lump sum options.
4. Systematic Investment Plan (SIP): SIP is a popular choice for investing in ELSS:
Allows disciplined, periodic investments (monthly or quarterly).
Reduces the risk of market timing by spreading investments over time.
5. Lump sum investment
Investors with a lump sum amount can invest in ELSS in one go. This is ideal for individuals with surplus funds and those nearing the end of the financial year looking to maximize tax benefits.
ELSS mutual funds offer a powerful combination for tax-saving benefits and long-term wealth creation, making a good choice for investors. It is a well-suited fund for long-term financial goals like Retirement planning, home buying, or for further studies. Aligning your investment with financial goals and risk tolerance is essential, and consulting a financial advisor can help you make informed decisions. ELSS is a smart and strategic way to save on taxes and grow wealth, ensuring a balanced and secure financial future.
Also, ELSS funds are an excellent choice for tax-saving and wealth-building. However, investors should assess their financial goals, risk tolerance, and investment horizon before opting for ELSS. Consulting a financial advisor can help make a well-informed decision.