Equity Linked Savings Scheme, commonly known as ELSS, is a type of mutual fund that offers investors the opportunity to save on their taxes while also gaining exposure to the stock market.
Unlike traditional tax-saving instruments such as the Public Provident Fund (PPF) or National Savings Certificate (NSC), ELSS has the potential to generate higher returns over the long term.
In this article, we will dig deeper into ELSS, its features, benefits, and provide some tips on how to make the most of this investment option.
What is an Equity Linked Savings Scheme (ELSS)?
ELSS is a type of mutual fund that invests primarily in equity and equity-related instruments. These funds are managed by professional fund managers who use their expertise and knowledge of the stock market to select a diversified portfolio.
The fund’s performance is linked to the stock market’s performance, which means that investors stand to gain or lose money depending on how the market performs.
One of the key features of ELSS is that it offers tax benefits to investors under section 80C of the Income Tax Act. This means that investors can claim a deduction of up to Rs. 1.5 lakhs on their taxable income by investing in ELSS.
This is a significant advantage as it allows investors to save on their taxes while also gaining exposure to the stock market.
What are the Options to Invest in ELSS?
Some of the options available for investment in ELSS include the following:
Lumpsum Investment:
This is a one-time investment where you invest a large amount in a single ELSS fund at once.
Systematic Investment Plan (SIP):
This method invests a fixed amount of money at regular intervals, such as monthly or quarterly, in an ELSS fund.
Switching:
This is moving your investment from one ELSS fund to another. This can be done if you want to change your investment strategy or are unhappy with the performance of the fund you are currently investing in.
Redemption:
This is selling your investment in an ELSS fund and withdrawing the proceeds. You can do this after the mandatory lock-in period of three years.
Benefits of ELSS Funds:
Some of the key features of ELSS mutual funds are:
Tax Benefits:
As mentioned earlier, investing in ELSS funds can help you save on your taxes. According to Section 80C of the Income Tax Act, investors who invest in ELSS funds are qualified to deduct up to Rs. 1.5 lakh from their taxable income.
Diversification:
ELSS funds invest in a diversified portfolio of equity securities, which helps to reduce the risk of investing in a single stock or sector. This diversification can help to generate better returns over the long term.
Lock-In Period:
Unlike other equity mutual funds, ELSS funds have a mandatory lock-in period of 3 years. This means that investors cannot withdraw their investments before the completion of the lock-in period.
Flexibility:
ELSS funds offer flexible investment options in India, such as lump sum and systematic investment plans (SIPs). This allows investors to choose the investment option that suits their financial goals and risk appetite.
Transparency:
ELSS funds are required to disclose their portfolio holdings on a regular basis, which provides investors with complete transparency about where their money is invested.
Overall, ELSS mutual funds are a good investment option for those looking to save on their taxes while also benefiting from long-term capital growth.
Higher Returns:
ELSS has the potential to generate higher returns than other tax-saving instruments such as PPF or NSC. This is because these funds invest primarily in equity and equity-related instruments, which have the potential to generate higher returns over the long term.
Long-Term Wealth Creation:
ELSS funds have the potential to provide higher returns over the long term compared to other investment options such as fixed deposits or traditional savings accounts. This can help to grow your wealth and achieve your long-term financial goals.
Convenient Investment Option:
ELSS funds offer convenient investment options, such as systematic investment plans (SIPs), which allow you to invest small amounts regularly
Professional Management:
Experienced fund managers manage ELSS funds using their expertise to select the best stocks and manage the portfolio.
This can help to maximize the potential returns and minimize the risks associated with investing in equities.
In summary, investing in ELSS can provide tax savings, diversification, long-term wealth creation, flexibility, and professional management, making it an attractive investment option for those looking to grow their money and achieve their financial goals.
What ELSS Plans are Available?
There are several ways to invest in ELSS funds, and the most common options are:
Growth Plan:
Under the growth option, the returns from the ELSS fund are reinvested and not paid out to the investor as dividends.
This allows the invested capital to compound and grow over time, potentially providing higher returns. However, the investor does not receive any regular income from the investment.
Dividend Plan:
Under the dividend option, the fund pays out a portion of its earnings as dividends to the investor at regular intervals. This provides the investor with a regular income from the investment.
However, the invested capital does not benefit from the compounding effect and may not grow as much as in the growth option.
Dividend Reinvestment Plan:
Under the dividend reinvestment option, the dividends paid by the fund are automatically reinvested in the fund, allowing the invested capital to benefit from the compounding effect.
This option provides the investor with both a regular income and the potential for higher returns.
How to Start ELSS Investment?
To start a tax-saving investment in an Equity Linked Savings Scheme (ELSS), you will need to follow these steps:
Choose a mutual fund company that offers ELSS funds. You can compare different fund options and their past performance to make an informed decision.
Open a mutual fund account with the chosen company. You will need to provide some personal and financial information, such as your name, date of birth, income, and bank details.
Select the ELSS fund you want to invest in and decide on the amount you want to invest. ELSS investments typically have a minimum investment requirement of around INR 500, but this may vary depending on the fund.
Choose a payment method. You can pay for your ELSS investment using a bank transfer, a debit or credit card, or a net banking service.
Submit your investment request and complete the transaction. After your investment has been processed, you will receive a confirmation and details, including the amount, the fund, and the investment date.
Ways to Invest in an ELSS Mutual Fund:
Here are some ways to invest in an ELSS:
Online:
Many mutual fund companies and brokerages offer the option to invest in ELSS funds online through their websites or mobile apps. This allows investors to easily compare different funds and make their investments conveniently from their own devices.
Offline:
Investors can also invest in ELSS funds through a physical application form, which can be obtained from the mutual fund company or a brokerage. The completed form and the necessary documents and investment amount can be submitted in person or by post.
Through a Financial Advisor:
Investors who are unsure about which ELSS fund to invest in or who need help with their investment planning can also seek the assistance of a financial advisor.
A financial advisor can provide guidance on the different options available and help the investor to make an informed investment decision.
Factors to Check Before Investing in ELSS?
When considering investing in an ELSS (Equity Linked Savings Scheme) mutual fund, there are several factors to consider to ensure that it is a suitable investment option for your financial goals and risk tolerance.
The following are a few important factors to consider:
Investment Objectives:
The first step in deciding whether to invest in an ELSS mutual fund is to identify your investment objectives. Are you looking to invest for long-term capital growth, income generation, or a combination of both?
Understanding your investment objectives will help you determine whether an ELSS mutual fund fits your needs.
Risk Tolerance:
ELSS mutual funds are classified as equity funds, meaning they invest in stocks and are subject to market risks.
Before investing in an ELSS mutual fund, it is important to assess your risk tolerance and determine whether you are comfortable with the potential for volatility and fluctuations in the value of your investments.
Fund Performance:
Before investing in an ELSS mutual fund, it is important to research its performance history.
This can give you an idea of how the fund has performed in different market conditions, which can help you determine whether it is a good fit for your investment objectives and risk tolerance.
Expense Ratio:
Another important factor to consider when investing in an ELSS mutual fund is the expense ratio, which is the percentage of the fund’s assets used to cover its operating expenses.
A lower expense ratio can help maximize the potential return on your investment, so it is important to compare the expense ratios of different ELSS mutual funds before making a decision.
Conclusion:
ELSS is a type of mutual fund that offers tax savings under Section 80C of the Income Tax Act. It invests primarily in equity and equity-related instruments, providing the potential for higher returns over the long term.
Investing in ELSS, or equity-linked savings schemes, can be an important way to save for the future.
These schemes offer several benefits, including tax savings, the potential for long-term capital appreciation, and the opportunity to diversify your investment portfolio.
Additionally, ELSS funds are required by law to invest a certain percentage of their assets in diversified equity instruments, which can help to reduce overall portfolio risk.
Overall, investing in ELSS can be a smart financial decision for those looking to save for their long-term goals.
However, investors should be aware of the associated risks and consider their financial goals and risk tolerance before investing in ELSS.
It is recommended to consult a financial advisor before making any investment decisions.