The Equity-Linked Savings Schemes (ELSS) set them apart from all other mutual fund plans due to the tax-savvy benefits. Under Section 80C of the Income Tax Act, ELSS plans are eligible for tax benefits of up to Rs 1.5 lakh. Although most plans with 80C benefits have longer lock-in times, it has the shortest lock-in time of three years. The amount invested here is deductible, which lowers a taxpayer’s obligation according to their tax band.
ELSS investment mutual funds, also known as tax-saver funds, have consistently offered relatively high returns compared to regular savings plans like Public Provident Fund, National Savings Certificate (NSC), and 5-year Tax Saver Fixed Deposit.
How do ELSS mutual funds function?
ELSS funds cover Diversified equity funds. According to their investing goals, these funds invest primarily in a predetermined percentage of listed company equities. Market capitalisation (Large Caps, Mid Caps, Small Caps) and industry sectors are considered when selecting the companies. Over the long term, these tax-saving mutual funds strive to optimise wealth appreciation. The fund manager selects equities to produce the best risk-adjusted portfolio returns after conducting a thorough market analysis.
Features of ELSS Mutual Fund
- Under Section 80C, they provide tax deductions of up to Rs 1,50,000 annually.
- There are no provisions for an early withdrawal from ELSS funds, which have a three-year lock-in period.
- While the minimum investable amount differs amongst fund houses, there is no upper limit on ELSS investments.
- An ELSS fund is the only tax-saving investment with the potential to deliver returns that outpace inflation.
- Tax deductions and wealth building are two advantages of investing in ELSS funds.
- An ELSS fund’s portfolio is primarily made up of stocks, while they also have some exposure to fixed-income assets.
Ways to Invest in ELSS Funds
- Growth option: As an investor, you will only receive profits at redemption; however, as the overall NAV increases, the profits increase. Remember that returns are based on market risk.
- Dividend option: With this option, an investor occasionally receives benefits in the form of entirely tax-free dividends. Only when there are excessive profits above and beyond are dividends issued.
- Dividend reinvestments option: With this option, an investor can reinvest dividends to raise the NAV. This is effective, especially when the market is experiencing an upswing and is expected to continue in that direction.
Who should invest in ELSS Mutual Fund?
- First-time investors: ELSS is an excellent option for new investors as, due to the tax advantages, you also get a taste of mutual funds and equities investment. The risk associated with stock investments is more significant, although typically just in the near term. The risk is substantially reduced if you invest for more than five years. The best strategy is to start investing in monthly SIPs throughout the year, just like with any equity investments. SIP in an ELSS fund enables you to collect more units during market downturns and to produce excellent returns during uptrends.
- Salaried Individuals: As a salaried employee, you must contribute a specific amount to your Employee Provident Fund (EPF), a guaranteed income investment. It is an excellent choice if one wishes to balance risk and return on their investment portfolio.
Factors to consider before investing in ELSS Mutual Fund
- Investment Horizon: To explore investing in ELSS funds, you must have a longer investment horizon than five years. You must have a longer investment horizon due to it’s equity exposure to reduce market volatility.
- Fund Returns: Before choosing a fund, evaluate its previous performance compared to its rivals and benchmarks to see if it has been consistent. A fund generates significant returns if it surpasses its benchmark or competitors.
- Expense Ratio: The ratio of expenses shows how much of your investment is used to manage the fund. Choosing funds with lower expense ratios is usually preferable because they allow for bigger take-home returns.
- Fund Manager: Another element to be considered is the fund manager, as this individual is crucial to managing your savings. The fund manager must be capable and experienced in selecting the best stocks and building a solid portfolio.
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