Everything about investing in ELSS funds
When it comes to mutual fund investments, most investors look for the ideal combination of good returns and tax savings. An equity-linked saving scheme (ELSS mutual funds) provides this ideal combination. In this article, we will understand what are ELSS funds, what makes ELSS mutual funds one of the best investment options to save tax and how can you plan for your financial goals with ELSS funds.
What is ELSS?
An equity-linked saving scheme (ELSS) is an equity mutual fund scheme offered by all AMCs. An ELSS has to invest a minimum of 80% of its total assets in equity and equity-related instruments in accordance with the Equity Linked Saving Scheme, 2005, notified by the Ministry of Finance. It is an open-ended scheme with a lock-in period of 3 years. It provides income tax deduction at the time of investment. We will discuss all these features in detail
Features of an ELSS
Now that we understand what an ELSS is, let us now look at its features.
Income tax benefits
When you invest in an ELSS fund, you can avail deduction from your taxable income under Section 80C of the Income Tax Act. The maximum deduction that you can avail in a Financial Year is the amount invested or Rs. 1,50,000, whichever is lower. The income tax benefit differentiates an ELSS from other equity mutual fund schemes as they don’t qualify for this benefit.
Minimum and maximum investment amounts
The AMC fixes the minimum amount that can be invested in an ELSS. The minimum amount may range from Rs. 500 to Rs. 1,000, which most people can afford. There is no maximum limit on the amount that can be invested in an ELSS. However, the maximum income tax deduction you can avail of in a Financial Year is Rs. 1,50,000.
Potential to give inflation-beating high returns
As an ELSS invests a minimum of 80% of its total assets in equities, it has the potential to give inflation-beating high returns. In the past, over long periods of investment, ELSS has given inflation-beating high returns. In the future also, if you have a long-term investment horizon, you can expect ELSS to give you inflation-beating high returns and create wealth for you.
Low lock-in period
An ELSS investment has a three-year lock-in period. Among all tax-saving investment products, ELSS funds have one of the lowest lock-in periods. If you are investing through SIP mode, each SIP instalment will have a lock-in period of three years.
Investment options: Lump sum and SIP
You can invest in an ELSS either in a lump sum or through systematic investment plan (SIP) mode. You should ideally invest through SIP mode as it provides you the benefit of Rupee Cost Averaging (RCA).
No exit load
As an ELSS has a lock-in period of three years, there is no exit load applicable for ELSS.
An ELSS fund manager invests the scheme money into large, mid, and small-cap stocks across market capitalisation. The stocks are chosen based on their long-term growth story. Hence, an ELSS provides diversification which is required to earn risk-adjusted returns.
Comparison of ELSS with other tax-saving investment products
Section 80C of the Income Tax Act provides a deduction of up to Rs. 1,50,000 in a financial year, from taxable income. The deduction is applicable on some investment products, including ELSS mutual funds. Hence, investors often compare ELSS with other investment products included in Section 80C.
So, let us compare ELSS with some other investment products that qualify for deduction under Section 80C.
|Lock-in period||Risk||Returns||Taxation on redemption / maturity|
|ELSS Mutual funds||3 years||High||High: Range of 10-15% p.a. over long-term||10% long-term capital gains (LTCG) tax on returns above Rs. 1 lakh in a year.|
|Public Provident Fund (PPF)||15 years||Low||Low to moderate: Range of 6-9% p.a.||Exempt from taxation|
|Bank fixed deposit||5 years||Low||Low: Range of 5-7% p.a.||Interest is taxable as per the income slab|
|National Pension Scheme (NPS)||Till age 60 years||Depends on the funds chosen for investment. High risk for equity funds and low risk for debt funds||High (10-15% p.a.) for equity funds over the long-term. Low (5-7% p.a.) for debt funds||Up to 60% corpus can be withdrawn tax-free. An annuity is taxable as per the income slab.|
|Unit Linked Insurance Plan (ULIP)||5 years||Depends on the funds chosen for investment. High risk for equity funds and low risk for debt funds||High (10-15% p.a.) for equity funds over long-term. Low (5-7% p.a.) for debt funds||The death benefit is tax-free. Capital gains will be taxable if the aggregate premium exceeds Rs. 2.5 lakhs in any financial year. LTCG tax will be 10% on LTCG exceeding Rs. 1 lakh in a year.|
As seen in the above table, ELSS has the lowest lock-in period of 3 years compared to the lock-in period of 5-15 years for other tax-saving investment products. Also, while ELSS has a high risk, it has the potential to give inflation-beating high returns.
How to use ELSS to create wealth?
Rajesh wants to build a retirement corpus of Rs. 1 crore in the next 20 years. He consults his Financial Advisor, Tina. After doing Rajesh’s risk assessment, Tina recommends Rajesh invest in an ELSS scheme.
She recommends that if Rajesh starts a monthly SIP of Rs. 10,326 (annual investment of Rs. 1,23,917), and if it gives a return of 12% CAGR, Rajesh will be able to accumulate his retirement corpus of Rs. 1 crore in 20 years. Along with wealth creation, Rajesh will save tax on his annual investment under Section 80C of the Income Tax Act.
Tina has made the following financial plan for Rajesh.
|Year||Amount at the start of year||Annual investment||Total amount||Growth rate||Amount at end of the year|
As seen in the above table, you can use an ELSS plan to invest and create wealth for yourself for achieving your financial goals with the magic of compounding.
ELSS: Ideal combination of tax saving and wealth creation
ELSS mutual funds are one of the best investment products. It helps you save tax along with wealth creation. It has one of the lowest lock-in periods of three years. You can invest a lump sum amount or start a SIP in an ELSS. Most AMCs will allow you to start a SIP with a minimum amount of just Rs. 500. Overall, ELSS mutual funds are one of the best investment products to help you save tax as well as achieve your financial goals.
Investing in ELSS with Glide Invest App
In the above section, we saw how you could use ELSS funds to achieve your financial goals. You can partner with the Glide Invest App for your financial planning journey. Based on your risk profile, you will get the recommendations for the appropriate ELSS and other mutual fund schemes. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved