ELSS or Equity Linked Savings Scheme – Concept, Features, Compatibility, Benefits, Process & moreLast Updated Date: Nov 16, 2022
The majority of investors tend to look for opportunities where they can invest and get some stable returns. This article explains the ELSS or Equity Linked Saving Scheme in Brief.
No doubt, there are a plethora of investment avenues available in the market and majority of them offer returns that are taxable under the income tax act.
Here is where the ELSS funds play a significant role. ELSS funds are Equity-linked savings schemes are tax saving equity mutual funds.
It is a type of mutual fund scheme that mainly invests in the stock market or equity-related instruments.
Investors can avail of tax deduction up to 1.5 lakh under section 80C of the income tax act. The best part about ELSS is that the lock-in period is three years.
In simple terms, when you invest in ELSS, you only need three years after purchasing it. But experts recommend that you must invest for a long time to earn maximum returns.
One of the most important aspects of a financial career is managing tax. The majority of the people wait till March when it comes to saving taxes.
When it comes to getting over on this topic, people end up in the wrong niches. It mainly happens with investors who have just started investing.
When it comes to financial goals, mutual funds are one of the most preferred choices for investors.
Above all, it is easy to invest in and available easily. Today mutual funds are one of the most liquid investments. Additionally, you can invest in a mutual fund with just Rs.500/-
About ELSS or Equity Linked Savings Scheme
ELSS funds are equity funds that invest the majority part of the corpus amount into equity or equity related instruments.
You can also call them tax-saving funds as they tend to offer a tax exemption up to Rs.150000 from the annual taxable income.
The mandatory lock-in period under the funds is three years. Currently, many investors choose to invest in the ELSS, all thanks to its tax saving feature.
Additionally, the income you earn under this scheme becomes a part of the long-term capital gain, and you have to pay a tax of 10%.
The two options available under ELSS are growth and dividend.
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Who should Invest in ELSS?
Here is the eligibility criteria related to who should invest in Equity Linked Savings Scheme –
If you are a salaried employee, then some part of your salary goes to the Employee provident fund, which forms a part of the fixed income.
ELSS is a fantastic option for employees who plan to strike a balance between risk and return. As compared to all other funds, the ELSS has the shortest lock-in period of only three years.
Additionally, investments are also eligible for a tax deduction.
The funds tend to offer unique opportunities for investors who want to minimize the liability of tax and also have capital growth.
You can surely choose this fund if you are willing to earn a significant amount of returns in the long run.
For Long Term Investment
Additionally, the scheme is suitable for investors who have a long-term investment horizon as the minimum lock in period is three years.
Above all, securities tend to perform well in the long run.
High Risk Appetite
The investors must have a tremendous risk-taking appetite mainly because the fund comprises of equities, and the equity market is quite volatile.
Ideal for First Time Investor
ELSS scheme is also ideal for first-time investors as they can get some tax benefits. You can start investing in ELSS through systematic investment plans over a year.
Find details of other Types of Funds here
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Features of the Equity Linked Savings Plan
Here are the major features of ELSS Scheme –
- The Equity-linked savings plan invests at least 80% amount of the corpus in the equity and equity-related tools.
- Additionally, the fund invests in equities in diversification, including the market capitalizations and themes.
- There is only a minimum lock-in period of 3 years as such, but no minimum tenure applicable to investors.
- Investors can also avail of tax exemption under section 80 C of the income tax act.
Benefits of Investing in ELSS
List is the list of various benefits of ELSS –
Better Returns – As ELSS fund is mostly an equity scheme; it can deliver high returns in the long run.
No doubt, it carries some risk, but when compared to other investment avenues, the ELSS funds also offer great returns.
As compared to additional funds, the scheme also has the lowest lock-in period.
Diversification – You can say that ELSS is a diversified scheme mainly because it invests in different assets in varying proportions, including debt and Equity.
Amid the equity category also, there are sub-categories available, including small cap, large-cap, and midcap funds.
By investing in ELSS, one can quickly diversify their investments and also mitigate the risk.
Professionals manage the Investment – When you invest in an Equity-linked savings scheme, then you can be stress-free.
It is because the fund managers who hold a lot of market experience manage the scheme. You can say your money is safe in their hands.
Even if you are busy to keep track of your portfolio, you don’t need to panic as these fund managers have got you. Through ELSS, you can earn returns and also hedge the risk.
Discipline in Investment – The investment in ELSS has a lock-in period of a minimum of 3 years, which makes investors discipline.
Additionally, investors who want to be more discipline can choose to invest through systematic investment plans.
As under those plans, you have to invest periodically as per predetermined rates and dates.
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Things to consider before Investing in ELSS
Here are few things every investor must consider before investing in Equity Linked Savings Plan –
Investment and Tax Planning
The majority of the investors choose to look forward to investing in an equity link savings scheme. It is because this is the only scheme that invests in equity and equity-related instruments.
There are a plethora of investments available under section 80C of the income tax act if you just want to save tax.
Hence, you must create an investment plan before investing in ELSS funds. It must also include tax planning. Above all, you can use these funds to achieve long term goals.
SIP or Lumpsum
If you want to avail tax benefits, then the ELSS fund is one of your best bets. It is the only reason why they use the entire corpus amount to the amount in a lump sum.
This mainly happens because investors are in a rush to save taxes, and lump sum investment is the only choice left. If you invest in the market when it is high, then it can be risky.
The majority of the young investors choose to invest in ELSS funds as the lock in period is only three years.
You can say it is a counterproductive strategy because investments take a lot of time to stabilize, at least 5 to 7 years.
Experts say investors must not keep a short term horizon with ELSS funds as the equity markets are quite volatile.
How can you invest in ELSS funds?
Investors can invest in ELSS funds online through various websites. Even if investors don’t wish to invest through online mode, they can always go through the offline mode.
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Different ways to invest in ELSS Funds
Growth Option – If you go for the growth option, then you can receive benefits in the form of dividends.
But investors can get gains only when they choose to redeem their units. Above all, you must know that returns are subject to market risk.
Dividend Option – The investor can avail time to time benefits in the form of dividends under this category.
Additionally, there is no tax applicable to dividends. The company declares dividends only if there are excessive profits.
ELSS or Equity Linked Savings Scheme – Conclusion
The best part about investing in ELSS is that investors can get the flexibility to invest either through SIP or lump sum mode.
As compared to other avenues, you can earn better returns under this scheme. Additionally, there is no maximum limit on investment under this avenue.
But under this scheme, investors also need to take some risk as the equity markets are volatile.
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