When we think of “Mutual Funds,” we usually think of Large Cap Funds, Mid Cap Funds, or Flexi Cap Funds. When considering tax-saving choices, the equity-linked savings scheme, or ELSS, comes to mind.
Many equity investors begin their investments in these funds with equity-linked investments before moving to equity mutual fund schemes. Because you can’t touch the fund during the three-year lock-in period, it encourages discipline. These funds also serve as a significant buffer against the risks associated with stock market investing. The system benefits from market highs and includes provisions to mitigate the adverse effects of market lows.
What is ELSS?
Equity Linked Savings Scheme (ELSS) is a mutual fund that invests primarily in the stock market (equity). ELSS Mutual Fund investments of almost Rs 1.5 lakh are eligible for a tax deduction under section 80C of the Income Tax Act. ELSS has a three-year lock-in period, which gives it an advantage over other tax-saving strategies. This means that you can only sell your investment three years after buying it!
To get the most out of your ELSS funds, though, you need keep your money in them for as long as possible. Each installment of an ELSS SIP has a three-year lock-in period, which means every one of your installments will have a separate maturity date.
Advantages of ELSS
High ROI
Because ELSS invests primarily in equity instruments, the returns are substantially higher than most tax-advantaged investment options in the long run. This accomplishes two goals: you save money on taxes while simultaneously generating significant earnings.
ELSS may be the best option for someone looking to invest for a medium to a lengthy period of time. ELSS has a track record of generating around 12% over ten years or longer. When compared to the PPF’s meager 8% returns, this is a huge increase.
Lock-in period
A lock-in period applies to all tax-saving investment options. The National Savings Certificate and tax-saving fixed deposits, for example, have a 5-year lock-in period. The lock-in period for the Public Provident Fund is 15 years. Furthermore, NPS savings are fully withdrawable only after retirement.
In comparison, the ELSS category has the minimum lock-in time, with all funds in this category requiring a 36-month minimum holding term before units can be redeemed. For instance, if you received 100 units in an ELSS fund on January 1, 2018, you can only redeem them three years later, on or after January 1, 2021.
Flexibility
It’s likely that your ULIPs, which were sold to you at a low cost directly from insurance companies, would generate returns similar to an ELSS over time. A ULIP, on the other hand, lacks the flexibility of an ELSS. Because you are not obligated to commit to a multi-year arrangement, you may switch to another fund if you are unsatisfied with your ELSS fund. If you are unsatisfied with a fund supplied by a ULIP, you can only switch and invest in funds offered by that ULIP.
Protection against volatility
When it comes to investing in equity-linked securities, ELSS mutual funds are frequently the first point of contact for investors. Many equity investors begin their investments in these funds with equity-linked investments before moving to equity mutual fund schemes.
Investment costs
There will be a regular and direct plan in an ELSS fund. For seasoned and knowledgeable investors, investing through a direct plan with a reduced commission structure and thus higher returns is recommended.
If you’re a novice, you could use an agent or an online aggregator to assist you in choosing the best ELSS fund for you, but you’ll pay a somewhat higher commission. This commission, which is included in the total expenditure ratio, ranges from 1-3 percent, depending on the plan or fund.
Final Thoughts
However, to choose ELSS funds, one must plan and not wait until the end of the year to make tax-saving investments. Savers make hurried and poor selections when it comes to tax-saving investments for various reasons. For one thing, many people who wait until the end of the year make no discretionary investments other than tax-savings investments. They have little prior expertise in this field and only invest once a year, usually falling victim to the first salesman who walks along. They believe that the work is done if an investment saves them money on taxes.
This strategy, however, is a waste of money. A smart tax-saving investment must first and foremost be an investment, then a tax-saver. An ELSS fund is the most sensible investment for the majority of people. This is because most salary earners already have some of the allowed amount going into fixed income through PF deductions, and equity is the best way to balance that.
