Just imagine an ideal scenario where you may get reasonable and stable revenue on your investment and simultaneously reduce your taxes at the same time. Fortunately, such a scenario exists in the real world thanks to a unique investment product known as the equity-linked saving scheme, which is also referred to as ELSS.
What are ELSS funds?
Equity-linked saving schemes (ELSS) are open-ended equity mutual funds that are known for investing primarily in equities and equity-related products. They are a special category of equity funds that qualify for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961. Therefore, they are popularly referred to as tax saving mutual funds.
Why invest in ELSS?
People who usually invest in equity are a lot more cautious about losing money in the market. Some investors, on the other hand, are careful about saving money and investing with a long-term perspective. While there are other types of mutual funds, an equity-linked saving scheme (ELSS) is ideal for investors who are looking for a mutual funds investment that will enable them to save on tax. ELSS is a kind of mutual fund scheme that invests most of its funds in both equity and equity-related products. There are numerous advantages of ELSS just like there are numerous benefits of mutual funds. Listed below are a few:
- ELSS comes with tax benefits:
Amongst the primary reasons to invest in ELSS is to save tax. Investments made in ELSS qualify for tax deduction under section 80C of the income tax act of 1961. Therefore, the revenue earned from ELSS becomes tax-free. The government of India is also known for providing tax rebates for equity-linked saving schemes (ELSS) under the provisions of 80C of the Income Tax Act 1961. You can invest in ELSS and deduct approximately ₹1,50,000/- from your taxable income to effectively reduce your tax liability.
- Helpful for long-term capital growth:
Even though the lock-in period for ELSS is 3 years, an investor can opt to remain invested for a longer duration. Doing so may increase the chances of continuous growth of the invested capital. However, equity investments are subjected to market risk and although these funds invest in equity, there are chances of higher returns combined with tax exemption, especially in the long term.
- They offer relatively higher liquidity:
Equity-linked saving schemes are known for providing higher liquidity as compared to other investment options. For example, PPF has a lock-in period of 15 years and the minimum lock-in period of all non-ELSS 80C investments is 5 years. As stated earlier, ELSS mutual funds come with a lock-in period of 3 years. Therefore, unlike other options, while invested in ELSS, your capital is not locked up for long periods. Moreover, you have an option to redeem your investment partially or fully post the completion of the lock-in period. If you invest in ELSS through the SIP, it is important to note that each SIP is locked in for 3 years. Therefore, while investing through SIP, you must carefully plan your ELSS investment.
- One can enjoy the benefit of equity exposure:
By investing in ELSS, you can enjoy the benefit of exposure to equity investments. You can gain from the growth cycle of stocks by including ELSS investment in your portfolio. Through savings, you can gain about 6-8% returns. However, by investing in equity, there may be chances of gaining higher revenue, especially during favourable stock market performance.
- ELSS encourages a habit of saving:
These schemes allow investors to systematically invest through the SIP mode with as little as ₹500 per month. A part of your savings can turn into investment as ELSS helps cultivate the habit of continued investing. With a lock-in period of 3 years, the income generated from ELSS through SIP investment can be availed every month after the completion of 3 years of the first SIP. Moreover, the returns are exempt from tax, thus allowing more profits in the hands of the investor.
While investing in this subcategory of equity funds, you must ensure to align your personal investment goals with the fund objective. Apart from making sure that your personal investment goals align with the fund while carefully studying your risk appetite and investment horizon.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.