Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund scheme that primarily invests funds in equity-oriented funds. This scheme offers the dual benefit of tax deduction under Section 80C of the Income Tax Act, 1961 & creation of wealth. Under this plan, the funds are primarily invested in equities, which are best suited for investors seeking long-term investment opportunities. To be precise 80% of the funds are invested in equity-oriented funds, & the remaining 20% is invested in debt. This investment plan helps mitigate market fluctuations while also creating wealth. The funds can be invested in ELSS through SIP or in a lump sum, making it an efficient & flexible plan that helps in tax planning.
Reasons to Invest in ELSS
Provided are the reasons to invest funds in ELSS:
- Expert Opinion:
The portfolio is managed by a panel of professionals who help you choose the funds.
- Diversification of Funds:
Choosing a variety of equity funds helps mitigate the risks.
- Low Investment Needs:
It starts with an amount as low as INR 500.
- Tax Savings & Wealth Creation:
It is the one & only mutual fund scheme that attracts tax deductions.
- High Liquidity:
It has the lowest lock-in period in comparison to other equity funds.
- Easy to Track:
Monitor your plan on a regular basis to make informed decisions.
Things to Be Considered Before Investing in ELSS Funds
Provided are the things to be considered before investing in ELSS Funds:
- Taxation Benefits
These are the only mutual fund schemes in India that offer tax deductions u/s 80C of the Income Tax Act, 1961. Under this plan, you can invest in equities to earn higher returns along with tax deduction up to INR 1.5 lakhs. But if the main objective is saving of tax without bearing market risks, consider other options available u/s 80C, such as PPF, NSC, FDs, etc.
- Investment Mode
These plans are not just meant for tax savings, but also wealth creation over a longer investment horizon. Investing in SIPs on a monthly basis helps to tackle the market fluctuations, extracting rupee cost averaging benefits.
- History of Funds
The investors are required to check the past performance of the fund before investing, just to have a basic idea of the expected returns.
- Fund Manager’s Experience
Assess the fund manager’s experience, evaluating how they helped in generating returns by switching between the funds in past years.
- Risk Appetite
Ascertain the risk acceptance level, i.e., the ability to take risks.
- Investment Horizon
It is the period for which the funds would remain invested, & plays a vital role in deciding whether long-term or short-term investments will best suit you. Long-term investment is best suited for investors who can wait for a longer duration & bear market fluctuations. On the contrary, short-term investments are best suited for investors who require funds in the short term & need liquidity in their investments.
Here, ELSS are considered to be long-term investment plans.
Steps to Invest in ELSS Mutual Funds
Provided are the steps that should be used to invest funds in ELSS mutual funds:
- Choose a Fund:
Select an ELSS fund based on your financial objectives & risk acceptance level.
- KYC Process:
Input the details related to KYC on the online portal or registered mutual fund distributor.
- Fund Selection:
Choose a specific ELSS where the funds are to be invested.
- Investment Amount:
Assess the amount to be invested along with the mode of payment, i.e. SIP or in a lump sum.
- Submission of Documents:
Submit the required documents such as your Aadhar card, PAN Card, etc.
- Application of Funds:
Once you have decided on the desired ELSS Fund, fill out the application form with all relevant details.
- Making Payment:
Make a payment towards the desired fund via online or bank transfer mode.
- Lock-In Period:
The lock-in period in the case of ELSS is a minimum of 3 years, which is quite less in comparison to other mutual fund schemes.
- Monitor of Investment:
Review the funds invested on a regular basis & maintain a record of them.
- Redeem or Stay Invested:
Once the lock-in period is completed, decide whether to redeem the funds or remain invested.
Benefits of Equity Linked Savings Scheme (ELSS)
Provided are the benefits of the Equity Linked Savings Scheme (ELSS):
- Lowest Lock-In Among Tax-Saving Investments
Among all tax-saving investment plans covered under Section 80C, this plan has the lowest lock-in period of 3 years amongst the mutual fund schemes. This means an investor cannot withdraw funds earlier than 3 years; any premature withdrawal would attract penalties.
- Diversified Investments
It uses the concept of diversification of funds, which means the funds are not invested in one single stock. This means it spread across multiple stocks, across different markets & sectors, balancing the performance of one another.
- Disciplined Investing
As we know, equity-oriented funds are subject to market fluctuations, hence should be left for a longer tenure to reap better returns. Hence, this inculcates a sense of disciplined investing.
- Mandatory Lock-in Period Enables Growth
The mandatory lock-in period of 3 years leads to the growth of funds.
- Tax Benefits
This plan offers a deduction of tax on the amount invested, a maximum of INR 1.5 lakhs u/s 80C of the Income Tax Act, 1961. Additionally, the capital gains are subject to tax in the following manner
- Short-term Capital Gains
These are not applicable under this plan, as an investor is required to remain invested for a minimum period of 3 years.
- Long-Term Capital Gains
In case of long-term capital gains, tax exemptions can be availed up to INR 1 lakh per annum. Any LTCG above INR 1 lakh will be subject to taxes @10% plus surcharge & cess.
- No Upper Limit
There is no upper limit in ELSS, which means you can invest as much as you can, subject to the risk acceptance level.
Conclusion
With a minimum lock-in period, these plans are highly liquid & offer high returns along with taxation benefits. It hence becomes crucial to assess the financial objectives & select a plan that well aligns with your investment objectives. It will help you make an informed decision to choose ELSS, maintain long-term needs & stay informed.
