What is ELSS & Its Advantages?

In your journey towards wealth creation, investments are of greatest importance. Depending upon an individual’s financial requirements along with the ultimate goal of wealth creation, there have been several options when it comes to investing your hard-earned money. Generally, you can invest in asset classes of broad categories: high-risk an investment like real estate, equity shares or mutual funds, a low-risk an investment like fixed deposits, government bonds or postal schemes.

What is ELSS (Equity Linked Saving Schemes)?

ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act. 

Who should invest in ELSS?

·         If you are someone who has just started earning and are looking for a safe and reliable investment, then you could consider ELSS.

·         If you are a high-risk investor looking to diversify your portfolio with some form of tax-savings then considers ELSS.

·         People of any age-group can invest in ELSS Mutual Funds. Market experts suggest investing in three-four high performing ELSS funds.

·         If your aim is wealth creation with a disciplinary approach you should investment in ELSS.

·         If you want to create Retirement corpus with a systematic approach you should invest in ELSS.

Advantages of ELSS Mutual Funds:

Here is a look at the advantages of these funds:

·         Tax Savings:

ELSS funds are the only type of Mutual Funds eligible for tax deductions. You can avail tax deductions up to Rs 1.5 lakh in a year by investing in the scheme. Section 80C of the Income Tax Act allows tax deductions on these funds.

Even after the new tax regime, where long-term capital gains from ELSS above Rs 1 lakh are taxable, these funds are one among the best tax-saving options. These offer higher post-tax returns vis-a-vis other investment options like Unit Linked Insurance Plans (ULIPs) or Public Provident Fund (PPF).

·         Short lock-in period:

Once you invest in ELSS funds, they remain locked in for 3 years. Other investments like Public Provident Fund (PPF), Employees Provident Fund (EPF) and National Savings Certificate (NSC) have a minimum lock-in period of five years. A lock-in period also inculcates an investor’s discipline.

·         Can provide a long-term return: 

Though the funds are locked-in for three years, you can allow the funds to grow further by not redeeming it after the stipulated time. As these funds invest in equities, over some time, it can help you create considerable wealth.

·         Inculcates the habit of saving:

You can invest in ELSS schemes with a minimum of Rs 500 per month. This is also known as the Systematic Investment Plan (SIP) in ELSS schemes. Thus, with minimum investments monthly, you can watch your wealth grow. What’s more, the investments will be exempt from taxation.

·         Higher returns: As these funds invest primarily in equities, you will, invariably, receive higher returns from the market. As per market experts, ELSS funds can get you returns which are twice or more than a simple savings scheme. Statistics reveal that ELSS, on average, generates around 12% returns over 10 years. This is a significant increase in vis-a-vis schemes like PPF, which generate around 8%.

Types of ELSS:

As an investor, you must be aware of the types of ELSS funds. These are:

• Growth Fund: This is a long-term wealth creation a platform for investors, where the full value of funds is realized at the time of redemption.

• Dividend payout: Here you have two options: Dividend payout and dividend reinvestment. In the case of dividend payout, you will receive the tax-free dividend, while in the case of latter, your dividends will be reinvested.

Conclusion

 ELSS Mutual Funds are among the best investment options, which provide higher returns with a short lock-in period. The best part is the tax-savings offered by the scheme. A diversified portfolio is a key to wealth creation and ELSS is a must-have financial instrument for every portfolio.

 Disclaimer:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes.