Equity Linked Savings Scheme or ELSS has gained significant popularity in recent times among Indian investors as a tax-saving and wealth-building investment avenue. ELSS mutual fund combines the benefits of tax savings under Section 80C of the Income Tax Act 1961 with the potential for wealth creation in the long term through equity market exposure. Investors looking for dual benefits in the investing space can choose this equity fund to make their financial portfolio more robust.
ELSS comes with a lock-in period of three years, making it the only tax-saving instrument in the Section 80C basket with a relatively short lock-in. Investors can claim a tax deduction of up to Rs 1.5 lakh under Section 80C for the amount invested in ELSS funds. It invests in equity and equity-related instruments.
An equity fund is a type of mutual fund or exchange-traded fund (ETF) that primarily invests in stocks or equities. These funds pool money from numerous investors to purchase a diversified portfolio of stocks, providing investors with a way to gain exposure to the stock market without having to individually select and manage a collection of stocks.
Benefits of ELSS Funds –
a. Tax Savings:ELSSmutual funds offer investors an opportunity to save taxes while providing exposure to the potential returns of the equity market.
b. Wealth Creation: Being equity-oriented, ELSS mutual funds have the potential for higher returns compared to traditional tax-saving instruments like PPF and FDs.
c. Short Lock-in Period: The three-year lock-in period is shorter than other tax-saving options, allowing investors to access their funds relatively quickly.
d. Systematic Investment: Investors can choose to invest in ELSS funds through systematic investment plans (SIPs), enabling them to benefit from rupee-cost averaging.
Risks Associated with ELSS Funds –
a. Market Risks: ELSS mutual fund investment is exposed to market fluctuations as they invest in equities. While this presents an opportunity for higher returns, it also involves the risk of capital loss.
b. Lock-in Period: Though shorter than other tax-saving instruments, the three-year lock-in may be a constraint for some investors needing more liquidity.
c. Performance Variability: The performance of ELSS mutual fund can vary based on market conditions and the fund manager’s decisions, requiring investors to monitor their investments regularly.
Tips for Investing in ELSS Funds –
a. Diversify Investments: Spread investments across different ELSS mutual fund schemes to reduce concentration risk.
b. Long-Term Perspective: Since equity investments are subject to market volatility, it’s advisable to have a long-term investment horizon when considering the ELSS equity fund.
c. Research Fund Performance: Before investing, research the historical performance, fund manager’s track record, and the fund’s investment strategy.
d. Regular Monitoring: Keep track of your ELSS fund’s performance and review your investment strategy periodically.
Conclusion –
ELSS funds offer a compelling blend of tax benefits and wealth creation potential, making them a preferred choice for investors seeking tax-efficient, high-return investment options. However, investors must carefully assess their risk tolerance, financial goals, and investment horizon before venturing into ELSS funds. With the right approach and informed decisions, ELSS mutual funds can play a crucial role in building a diversified and tax-efficient investment portfolio.
