What is Equity Linked Savings Scheme?
Equity Linked Savings Scheme (ELSS) is a kind of Mutual Fund scheme that predominantly invests in Equity & Equity related instruments to generate high returns.
What makes ELSS different from other Equity MF schemes is that investment upto ₹ 1.5 lakh in ELSS is eligible for deduction from taxable income in a financial year.
The scheme comes with a statutory lock-in period of 3 years for each SIP.
It is the only mutual fund scheme that qualifies for tax deduction under Section 80(C) of the IT Act.
Benefits of Investing in ELSS :
1. High Returns : Since Equity Linked Savings Scheme is essentially an equity scheme, it has the potential to deliver exponential returns in the long run. Although risky, investment in ELSS has the potential to deliver significantly higher returns when compared to traditional tax saving instruments. Moreover, ELSS has the lowest lock-in period amongst all other tax saving avenues.
2. Tax Exemption : If your mutual fund savings offers tax saving opportunity, along with high investment growth, what more can you ask for. ELSS allows you to save taxes, as investment upto ₹1.5 lakh in these schemes is eligible for tax exemption.
3. Diversification : Investment portfolio of ELSS consists of balanced allocation to different asset classes such as equity and debt securities. Besides this, numerous funds diversify within the equity category as well, allocating assets to large cap, mid cap, small cap equity stocks. Via ELSS, one can easily diversify their overall investment portfolio & effectively mitigate market risk.
4. Professional Management of Investment : As the investment portfolio is managed by professional experts who are well-informed about the market sentiment & functioning of capital markets, the investors’ money is in safe hands. Even if you don’t have much knowledge about the working of financial markets or lack time to track the market, you can still capitalize the returns from equity markets, via investment in ELSS.
5. Disciplined Investment : Investment in ELSS requires a minimum lock-in of 3 years, which instills investment discipline amongst consumers. For a more efficient disciplined investment approach, you can also invest via Systematic Investment Plan (SIP) in ELSS, which requires periodic installments in the fund on predetermined date. However, it should be noted that each SIP installment remains locked-in for 3 years.
Who Should Invest in ELSS?
ELSS offers an amazing opportunity to investors who want to reduce their tax liability along with high capital growth. If you’re looking for equity investment avenues that will deliver significant returns in the long run, you can opt for this fund.
This scheme is suitable for investors with a long term investment horizon (preferably more than 3 years), as the fund has a minimum lock-in period of 3 years. Also, it has been observed that equity securities perform well in the long run & this mandatory lock-in period ensures that the investors remain invested.
As the underlying assets mostly comprise equity securities, which are quite volatile, it is important that the investor has a high risk appetite to invest in ELSS & a long term wealth creation goal.
If you have already invested ₹ 1.5 lakh in various tax saving instruments under Section 80(C), it is advisable to opt for other equity funds that don’t have any lock-in period. Or you could even consider other tax saving instruments that can come under other sections to save tax for eg: health insurance for self/spouse/parents or National Pension System.
