Investors are always on the lookout for funds that will earn them a higher assured return. However, the tax payable on the funds makes them hesitant about investing in mutual funds. This is where the equity-linked savings scheme (ELSS) comes into play. ELSS mutual funds are tax-saving mutual funds.
ELSS mutual funds are equity funds that involve investing a major proportion of the corpus into equity or equity-related instruments. These funds are often called tax-saving funds as they are entitled to a deduction from gross total income up to Rs. 1.5 lakhs under the Income Tax Act. Recently, the Securities and Exchange Board of India (SEBI) approved the launch of passively managed ELSS by mutual fund houses.
What is ELSS and how does it work?
ELSS mutual fund is a diversified, open-ended mutual fund that focuses on investing in the stock market or equity. ELSS has a lock-in period of 3 years, which is the shortest lock-in period of all the tax-saving instruments under Section 80C of the Income Tax Act. The lock-in period is the minimum time period before which an investor cannot redeem the invested units. ELSS funds also have the potential to outperform other tax-saving instruments such as PPF.
These diversified equity funds primarily invest in stocks of listed firms. The stocks are selected from across market capitalizations (large-cap, mid-cap, and small-cap) and industry sectors. The primary aim of investing in ELSS mutual funds is to maximize capital appreciation in the long run. To produce the best risk-adjusted portfolio returns, the fund manager selects equities after doing extensive market research.
Put simply, the returns on ELSS mutual funds depend solely on the market value of the stocks or equity. If the market value fluctuates positively, the investor enjoys positive returns, else the investor is forced to bear losses that incur as a result of the negative trend in the market value of the stock.
Benefits of ELSS Tax Saving Mutual Funds
Tax-efficient: The ELSS fund is the only mutual fund that provides ELSS tax benefits under Section 80C of the Income Tax Act, 1961. There is a cumulative deduction benefit, which entitles the investor to tax deduction under Section 80C for investments made in ELSS up to Rs. 1.5 lakh in a financial year. Since the ELSS fund is eligible for a rebate, it implies that one can save up to Rs. 46,800 in taxes per annum.
Short lock-in period: ELSS has a lock-in period of 3 years. This is the shortest lock-in period among all other tax-saving instruments under Section 80C, such as PPF, fixed deposit, and life insurance. The lock-in period induces stability in the life cycle of a mutual fund, otherwise causing liquidity issues. It also refrains the investor from making withdrawals before the stipulated time, thus maximising the benefits that an investor reaps from their investment.
How to Invest in ELSS?
The process of investing in ELSS mutual funds is quite simple and straightforward. You can make the ELSS investment both online and in offline mode. It is easiest to invest online through an Online Investment Services Account. To invest in ELSS funds, you will have to declare certain personal information such as your taxable income. You can invest either a lumpsum amount or can opt for a Simple Investment Plan (SIP).
With great potential to outperform other similar tax-saving instruments such as PPF in the long term, ELSS funds provide great returns even at a minimal amount. Some of the best ELSS funds, such as the IDFC fund, provide nearly a 16% annualized return.
Conclusion
If you’re looking to invest and need a place to start, ELSS funds are your go-to choice! They are tax-efficient, have the shortest lock-in period among other tax-saving instruments, and are a great option to generate wealth in the long term.
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