ELSS Mutual Funds 2022: Reasons to Invest in Equity Linked Savings Scheme
An ELSS is an open-ended mutual fund scheme that invests primarily (minimum 80% of assets) in equity and equity-related instruments. An ELSS fund can be thought of as a three-year mandatory lock-in scheme. Many taxpayers have turned to ELSS schemes to take advantage of tax benefits in recent years. If you invest in ELSS schemes, you can get a tax exemption on your investment amount up to Rs. 150,000. Furthermore, at the end of the three years, the income you receive under this scheme will be considered Long Term Capital Gain (LTCG) and taxed at a rate of 10%. (if the income is above Rs. 1 lakh).
ELSS is different from other equity mutual fund schemes in two aspects: Investment in an ELSS provides income tax benefits and has a lock-in period of 3 years. The primary objective of an ELSS is to generate medium to long-term capital appreciation from a diversified portfolio.
Features of ELSS Funds
The following are some of the essential characteristics of ELSS mutual funds:
- Under Section 80C, they provide tax deductions of up to Rs 1,50,000 per year.
- ELSS funds have a three-year lock-in period, and there are no provisions for early withdrawal.
- The maximum amount you can invest in an ELSS is unlimited, whereas the lowest amount you can invest varies by the fund company.
- ELSS funds are the only tax-advantaged investment that can outperform inflation.
- Investing in ELSS funds provides you with tax benefits and the opportunity to build wealth.
- An ELSS fund's portfolio primarily stocks, with some fixed-income instruments thrown in for good measure.
Tax Benefits Offered by ELSS Mutual Funds
As previously stated, Section 80C of the Income Tax Act allows you to deduct the principle you invest in an ELSS programme. In addition, there is a cumulative deduction benefit, which means you can claim a tax deduction of up to Rs. 1.5 lakh for investments made in any of the designated instruments, such as ELSS, NSC, PPF, and so on, under the provision mentioned above.
Furthermore, these plans have a three-year lock-in period. As a result, when you redeem the units, you get long-term capital gains or LTCG. These gains are not taxable up to Rs. 1 lakh in a single financial year. However, any LTCG above this threshold is taxed at 10% of the gains over Rs. 1 lakh, with no indexation.
8 reasons for investing in an ELSS
Now that we have understood what ELSS is, let us understand why you should choose to invest in an ELSS. While there can be several reasons why you should choose to invest in an ELSS, some of these include:
- Potential to earn inflation-beating high returns: ELSS funds invests a minimum of 80% of its assets in equity and equity-related instruments. Historically, equities have outperformed most asset classes in terms of generating high returns. Also, historically, equities have consistently given inflation-beating returns over long periods of investment. There is no reason to believe that in the future also equities will continue to generate inflation-beating high returns. ELSS is one of the best investment products to benefit from this.
- Income tax benefits: Investments made in an ELSS are eligible for a deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction that can be availed is Rs. 1,50,000 in a financial year.
- Low lock-in period: An ELSS has a lock-in period of 3 years. From amongst all investment products eligible for deduction under Section 80C of the Income Tax Act, ELSS has the lowest lock-in period. Please note that if you are investing through a systematic investment plan (SIP), then each investment instalment will have a lock-in period of 3 years starting from the date of investment.
- Low minimum investment: Investment in an ELSS starts from as low as Rs. 500. This low investment is affordable to most people who wish to invest in an ELSS.
- The flexibility of investing a lump sum or through SIP: You can invest a lump sum amount in an ELSS or you can invest through a systematic investment plan (SIP). While your SIP is going on if there is a big fall in the stock market and if you have some investible surplus, you can deploy it as a lump sum along with continuing your regular SIP.
- No exit load: Since an ELSS has a lock-in period of 3 years, it doesn’t have an exit load. When there is no exit load, your returns will not be affected.
- Professional management: The fund manager managing the ELSS money is qualified and has many years of experience in managing people’s money and delivering good returns. By investing in an ELSS you can benefit from this professional management for a very small fee in the form of an expense ratio.
- Diversified portfolio: An ELSS fund manager gets the freedom to invest in a most diversified portfolio for the long term as he/she gets access to long-term funds from its investors. The fund manager can diversify his/her portfolio based on market capitalisation by investing in a mix of large-cap, mid-cap, and small-cap companies. He/She can also diversify across various sectors financial services, Information Technology (IT), pharma, oil and gas, etc. They can also choose to invest in various themes such as consumption, digitisation, rural economy, etc. By investing in an ELSS, you can get access to this kind of diversified portfolio which can minimise your risks and maximise your returns.
Factors to Consider while Investing in ELSS
When deciding whether or not to invest in an ELSS mutual fund, keep the following points in mind:
- Investment Period: To invest in ELSS funds, you must have a longer-term investment horizon than five years. To limit market volatility, ELSS funds' equity involvement necessitates a longer investment horizon to limit market volatility.
- Returns: You should be aware that ELSS funds do not guarantee returns because their success is contingent on the performance of the underlying stocks. Having a longer investment horizon than five years, on the other hand, can yield better returns than any other tax-saving investing strategy.
- Lock-In Period: Lock-in term: ELSS mutual funds have a three-year lock-in duration. Your investments are required to be locked in for three years from the date of purchase, and you cannot redeem them until that time has passed.
ELSS and other Tax Saving Schemes: A Comparison
There are various tax-savings schemes that can help you accumulate wealth over time. These are FD, PPF and NSC to name a few. However, the profits on these strategies are limited. This is where ELSS shines: its returns are consistently better, especially when markets are trending upward. ELSS mutual funds are the finest tax-saving investment option because they have a three-year lock-in period. Even after taxes, the returns on ELSS are far superior than any other tax-saving investing choice.
|Investment||Returns||Lock-in Period||Tax on Returns|
|5-Year Bank Fixed Deposit||4% to 6%||5 years||Yes|
|Public Provident Fund (PPF)||7% to 8%||15 years||No|
|National Savings Certificate||7% to 8%||5 years||Yes|
|National Pension System (NPS)||8% to 10%||Till Retirement||Partially Taxable|
|ELSS Funds||15% to 18%||3 years||Partially Taxable|
ELSS is your best investment option for achieving financial goals – The 3 most important insights are
- Good return on investment
- Tax benefits
- Low lock-in period
For long-term financial goals like building a fund for your child’s higher education or marriage or your retirement, ELSS is the best investment option. ELSS as an investment product can give you an enviable combination of potential to create wealth with small regular investments, income tax benefits, and access to a diversified portfolio that minimises risks and maximises returns. In short, ELSS can be your best companion in your financial planning journey.
To achieve your financial goals and to make the most of income tax benefits, invest in an ELSS now through the Glide Invest app. The last date to avail the tax benefits for this financial year is 31st March 2021.
Q1: What are ELSS funds, exactly?
A1: ELSS Funds are a type of mutual fund that is qualified for tax deductions under Section 80C of the Internal Revenue Code of 1961. These mutual funds are equity-oriented, with shares accounting for up to 65 percent of their portfolio. Investing in ELSS funds is a great way to plan for the future while also saving money on taxes. Tax deductions and long-term wealth creation are both advantages of an ELSS investment.
Q2: How does ELSS work?
A2: ELSS mutual funds are a type of mutual fund that invests primarily in stocks and other equity-related instruments. They are the only mutual funds that qualify for tax deductions under Section 80C of the Internal Revenue Code of 1961. A tax rebate of up to Rs 1,50,000 per year might save you up to Rs 46,800 in taxes. These funds must invest at least 65 percent of their portfolio in equities, with the remainder going into fixed-income assets. These funds have the shortest lock-in duration of all Section 80C investments, at three years.
Q3: How can I get an ELSS account opened?
A3: You must first open an investment account with the fund company of your choice in order to invest in an ELSS. It is completely free to open an investment account. After that, you must go through KYC verification, which requires you to submit a photo in the prescribed format, your PAN, and a valid proof of address. After that, you can go to the fund house's website and buy units in a tax-saving or ELSS mutual fund.
Q4: How much should I invest in ELSS funds?
A4: With ELSS, there is no limit on the amount that can be invested. The tax benefits, however, are limited at Rs 1,50,000 per year. You might start by investing Rs 1.5 lakh per year to make full use of your Section 80C limit. You can invest more than the maximum once the limit has been reached if you are ready to lock in your investment for three years. If not, you might want to explore investing in open-ended mutual funds.
Q5: Is there a way out I can redeem my ELSS money before 3 years?
A5: Only those ELSS fund units (investments) that have completed a three-year lock-in period can be redeemed. You can redeem your mutual fund investments in one of two ways. One, selecting for a one-time lump sum withdrawal — only investments that have completed their lock-in period will be redeemable. Two, start a systematic withdrawal strategy, often known as an SWP. It is the procedure of withdrawing a predetermined amount at predetermined periods.