ELSS or Equity-Linked Savings Scheme have been quite the talk of the town for a long time now. Investors prefer to invest their savings in these tax-saving investments for a number of benefits it provides to investors. Apart from the tax-saving benefits it offers to investors, it also helps them to earn a good return on investment (ROI). Let’s understand more about ELSS funds and how they serve dual benefits.
What are ELSS funds?
ELSS funds are a type of mutual funds that invest majority of their portfolio at least 80% of their assets in equities and equity-related securities. ELSS funds are commonly known as tax saving mutual funds for the tax benefits it offers to its investors. ELSS mutual funds are eligible for a tax deduction under Section 80C of up to Rs 1.5 lacs p.a. However, one must be aware that the tax deduction of up to Rs 1.5 lac is cumulative tax deduction of all Section 80C investments. For instance, Ramesh invests Rs 40,000 per annum in PPF (public provident fund) and Rs 20,000 towards NPS (national pension scheme). Then only Rs 90,000 in ELSS funds would be eligible for tax deduction. Apart from tax saving benefits, ELSS funds have huge potential to generate significant returns due to higher exposure towards equities and equity-related securities. This is the reason why ELSS funds are known to serve dual purpose of tax-saving benefits and capital appreciation. Just like any other Section 80C investments, ELSS funds have a lock-in period as well. However, ELSS mutual funds enjoy the lowest lock-in period at just three years against other tax-saving investments.
ELSS mutual funds are a great investment option to generate wealth in the long run. As ELSS funds invests the majority (at least 80% as mandated by the SEBI – Securities and Exchange Board of India) of their portfolio in equities and equity-related securities, these mutual funds have the potential to generate inflation-beating returns. Historically, ELSS tax saving funds have offered double-digit returns to investors when invested for a longer duration, say 10 years or more.
Just like any other type of mutual fund, you can invest in ELSS funds either through the disciplined approach of SIP (systematic investment plan) or one-time investment through lumpsum investment. If you choose to invest in ELSS through SIP mode of investment, you must be careful that each SIP instalment would have to complete three years lock-in period. In short, each SIP instalment would count as a new ELSS investment.
Although ELSS funds have a lock-in period of just three years, experts recommend staying invested for a longer duration so that the equities are offered the opportunity to perform at their maximum potential. Don’t forget that if you belong in the highest tax slab bracket, you have the opportunity to save up to Rs 46,800 by investing in ELSS tax saving mutual funds. Just like any other mutual funds, before you invest in ELSS, make sure that the scheme you choose aligns with your investment portfolio, risk profile, and financial goals. Happy investing!