Equity Linked Saving Schemes are a popular type of investment option among Indian investors. This is because they not only offer tax-saving benefits but also help in growing wealth in the long term. However, before diving into the world of ELSS, it is crucial to understand how they work, what makes them attractive, and whether they would help you achieve your financial goals.
This article will help you gain a deep understanding of ELSS funds. After going through this article, you’ll be able to identify the top ELSS funds, understand tax benefits provided by ELSS funds, their lock-in periods, and much more.
What are ELSS Funds?
The type of mutual fund that invests in equity and equity-related instruments is known as ELSS funds. By investing in ELSS funds, investors can claim tax deductions of up to Rs. 1.5 lakh per financial year under Section 80C of the Income Tax Fund, 1961. In these funds, there is a mandatory lock-in period of three years. It is the only mutual fund category that offers tax benefits and market-linked returns.
Key Features of ELSS Funds
ELSS fund is a popular choice among Indian investors due to its unique features. Some of them are mentioned below.
- Tax Benefits
One of the most important reasons that compels Indian investors is the tax-saving benefit of ELSS funds. By investing in ELSS funds, investors can claim tax deductions under Section 80C thus reducing their taxable income by Rs. 1.5 lakh rupees in a financial year. This is most beneficial for salaried individuals and others who want to save taxes while earning higher returns with a single investment.
- Lock-in Period
As compared to other tax-saving instruments such as Public Provident Funds (PPF) or National Savings Certificates, ELSS funds come with a relatively shorter lock-in period of three years. This means that you cannot withdraw your invested amount for 3 years. The lock-in term encourages inventors to practice long-term investing, a feature that is essential in wealth generation.
- High Potential Returns
The funds invested in ELSS funds are primarily invested in equity and other equity-related schemes. Therefore they have the potential to deliver higher returns compared to other tax-saving instruments. However, it is important to remember that the stock market is volatile and thus the returns offered are not guaranteed. Top ELSS findings have historically outperformed other tax-saving instruments. However, it is important to stay invested for the long term to reap the desired benefits.
- Risk Factor
As compared to other tax-saving instruments, the risk factor associated with investing in ELSS funds is higher. This is because ELSS funds invest in equity and the equity market is subject to market fluctuations. However, the three-year lock-in period allows the investors to ride out the short-term volatility and benefit from the long-term growth.
How to Choose the Top ELSS Funds
To maximise your returns, it is important to select the top ELSS funds. Below are some of the factors you must consider while evaluating ELSS funds.
- Fund Performance
The past performance of the ELSS fund is the key indicator you must consider while evaluating an ELSS fund. This is because they provide an insight into how well the fund has performed throughout various fund cycles.
- Experience of the Fund Manager
The performance of an ELSS fund depends upon the experience and the track record of the fund manager. To generate superior returns, a seasoned fund manager must have the ability to navigate through various market conditions.
- Expense Ratio
The annual fee charged by the mutual fund from its investors is known as the expense ratio. As it directly impacts your investors, it is important to choose funds with a lower expense ratio while having other favourable parameters.
- Risk-Return Tradeoff Depending Upon Portfolio Composition
Assessing your risk appetite is important before choosing to invest in ELSS funds. The risk directly depends upon the diversity of the portfolio. Funds that have invested in large-cap stocks offer stability and potentially lower returns while funds that have invested in mid-cap and small-cap stocks might offer higher returns and less stability.
Using a Mutual Fund App for ELSS Investments
Investing in ELSS funds is simpler and more accessible in today’s digital age. You can invest in ELSS funds using the mutual fund SIP and ELSS feature since it helps investors set up automatic monthly investments in ELSS funds. These apps provide other useful features such as ELSS calculators that help you estimate your returns and tax savings.
Conclusion
ELSS fund investments offer a unique combination of tax-saving benefits and wealth creation. However, before investing in ELSS funds, it is crucial to assess your risk appetite as ELSS funds are invested in the equity market. The three-year lock-in term of the ELSS funds helps investors stay invested for a longer period and avoid the volatility of the equity market.
