Most of the equity investors in India are extremely cautious when it comes to investing or losing money in the stock market. On the other hand, the well informed and smart are not only cautious about saving their hard-earned money while investing but also save tax on profits from investments. Investing in mutual funds, no doubt is one of the topmost choices among the customers who want to accumulate wealth and meet their financial objectives. There are different types of mutual funds available for investing. For example, if you plan to invest your money in the debt funds, then you are assured of the stable income. There are equity funds that are suitable for high returns and long-term growth. What about the tax savings? Is there any fund that provides the profits along with helping in saving tax? Well, the answer is YES, there is a fund, which is known as the Equity Linked Saving Scheme (ELSS).
What is ELSS?
Equity Linked Saving Scheme (ELSS) provides a ‘WIN-WIN’ situation to the investors. Firstly, it helps the investors incur profits through equities and secondly the individuals can get a tax exemption on the investment under Section 80C of the Income Tax Act and save huge money. These two advantages of ELSS funds make them extremely popular among the investors of every age group.
In simple terms, ELSS is essentially an open-ended equity mutual fund that helps the people to save and at the same time grow their money. When most of the equity funds levy the Long Term Capital Tax (LTCG) tax, ELSS is one mutual fund that provides the tax benefits to the people. That is why these kinds of funds are also known as the tax saving mutual fund schemes. ELSS funds have a shorter lock-in period of 3 years and any profits earned after redeeming the ELSS fund units are counted as the long term gains from equity funds and hence are not taxed. Under the Section 80C of the Income Tax Act 1961, an individual can get a maximum tax exemption of Rs 1, 50,000 on the ELSS funds.
Important Point to Remember: There is a general misconception among the people that the ELSS funds provide the guaranteed returns. However, this is not the case. They basically invest into the equity shares of the companies that may fluctuate considerably for the short period of time. However, it is worth mentioning that they have also known to provide higher returns consistently by beating other fixed maturity plans. Hence, if you are young and planning to invest for the longer period of time, then it is quite better to invest in ELSS funds to meet your financial goals and most importantly save taxes.
How to Invest in ELSS Funds?
Investment in ELSS fund can be made as low as Rs. 500 per month, which goes on inculcating the habit of investing or saving among the people. The best part is that there is a restriction on the maximum amount you can actually invest. You can either take the Systematic Investment Plan (SIP) route or make a lump sum investment to start investing in ELSS funds. However, there are some prominent points that must be taken into consideration before you start to invest in ELSS funds. These are as follows:
- There is a lock-in period of 3 years in ELSS funds, which means that you cannot redeem from before the completion of the mandated years.
- Investment in ELSS can either be made offline or online.
- These funds do not have any entry or exit load.
- If you are a Non-Resident Indian (NRI), then also you can invest in ELSS funds.
- There are two options available in the ELSS funds – The Growth Option and The Dividend Option. The growth option is suitable for long-term investors. Here, an investor receives accumulated amount of the investment and profits after the completion of the lock-in period of the 3 years. On the other hand, in the dividend option, an investor receives tax-free dividend payouts during the investment period.
Important Point to Remember: Have you ever thought what if the market is bearish after the completion of the lock-in period? In such a situation, if you wish to redeem your ELSS fund, then there are chances that you may end booking the loss. In such a situation, you may think upon reinvesting your money by increasing your time horizon for 4-7 years, which can help you to recover your losses to some extent.
Advantages of ELSS Funds
- It comes with a 3 year lock-in period, which is quite shortest when compared with other investment options like the Public Provided Fund (PPF) and National Savings Certificate (NSC) having a lock-in period of 15 years and 8 years respectively.
- The biggest advantage of investing in ELSS fund is that it offers a tax benefit up to Rs 1,50,000 according to the Section 80C of the Income Tax Act, 1961.
- ELSS funds are known to provide higher returns to the investors when compared with the other investment options. PPF provides around 6-8% returns, while the ELSS funds offer around 10-15% returns.
- You have the flexibility to invest in ELSS funds through the SIP or lump sum mode.
- If you are new to the stock market, then there is no need to worry because it is managed by the professional fund managers.
- There is no maximum limit for investing in ELSS funds. However, one very important thing to take note of here is that you can only save up to 1.5 lakh only in taxes.
Disadvantages of ELSS Funds
- ELSS has a lock-in period of 3 years, which means that you cannot liquidate date before the due date in case of any emergency financial requirement.
- Selecting the right funds to get better returns is extremely important in the case of the ELSS funds. If you are a beginner, then it makes a great sense to either consult a certified financial advisor or carry out your own research work.
To Sum Up
It cannot be debated that the ELSS funds are one of the excellent ways of materializing your dream of accumulating wealth and tax saving. Furthermore, an investor can get an additional benefit of inculcating the habit of investing regularly that may help him to meet financial objectives and chase dreams efficiently.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.