ELSS mutual funds are a type of equity mutual funds that offer tax benefits to investors under Section 80C of the Income Tax Act. ELSS stands for Equity Linked Savings Scheme, which means that these funds invest at least 80% of their corpus in equity or equity-related instruments. ELSS funds have a lock-in period of three years, which is the shortest among all tax-saving instruments. This article will define ELSS funds, describe how they operate, list their advantages and hazards, and describe how to invest in them.
What are ELSS Funds?
ELSS funds are mutual funds that place the majority of their investments in equity or equity-related securities like shares, debentures, convertible bonds, etc. of companies across different sectors and market capitalizations. ELSS funds aim to generate capital appreciation over the long term by participating in the growth potential of the stock market.
ELSS funds are also known as tax-saving funds because they offer tax deduction under Section 80C of the Income Tax Act, 1.5 lakh of your yearly taxable income. This means that if you invest Rs. 1.5 lakh in ELSS funds in a financial year, you can reduce your taxable income by the same amount and save tax accordingly.
ELSS funds have a lock-in period of three years from the date of investment, which means that you cannot withdraw or redeem your units before completing three years. This helps you to stay invested for the long term and benefit from the power of compounding. However, you can continue to hold your units even after the lock-in period is over and redeem them whenever you want.
How do ELSS Funds work?
ELSS funds work like any other equity mutual fund, except that they have a lock-in period of three years and offer tax benefits under Section 80C. Here are the steps involved in investing in ELSS funds:
- Choose an ELSS fund that suits your risk profile, investment objective and time horizon. You can compare different ELSS funds based on their past performance, ratings, portfolio composition, expense ratio, etc. You can also use online platforms or tools to find the best ELSS funds for your needs.
- Decide how much you want to invest in ELSS funds. You can invest up to Rs. 1.5 lakh in a financial year to claim tax deduction under Section 80C. If you want to reach your long-term objectives, you can invest more money than that.
- Decide how you want to invest in ELSS funds. You can invest either through a lump sum or a systematic investment plan (SIP). A SIP is a recurring investment of a specified amount at predetermined periods as opposed to a lump payment, which is an investment made once. A SIP helps you to invest in a disciplined manner and average out the cost of purchase over time.
- Fill up an application form and submit it along with the required documents and cheque or online payment details to the fund house or intermediary. You will receive an account statement confirming your investment and allotting you units of the ELSS fund.
- Track and monitor your investment periodically and review its performance against your expectations and goals. You can also switch or redeem your units after completing three years of investment.
What are the benefits of investing in ELSS Funds?
Investing in ELSS funds offers several benefits to investors, such as:
- Tax saving: You can save tax up to Rs. 46,800 (assuming 30% tax bracket) by investing up to Rs. 1.5 lakh in ELSS funds under Section 80C.
- Higher returns: ELSS funds have the potential to deliver higher returns than other tax-saving instruments such as PPF, NSC, FDs, etc., as they invest in equity markets that have historically outperformed other asset classes over the long term.
- Shorter lock-in: ELSS funds have a lock-in period of only three years, which is the shortest among all tax-saving instruments. This gives you more flexibility and liquidity than other options.
- Diversification: ELSS funds invest across different sectors and market capitalizations, which helps you to diversify your portfolio and reduce risk.
- Low minimum amount: You can start investing in ELSS funds with as low as Rs. 500 through SIP or lump sum mode.
What are the risks of investing in ELSS Funds?
Investing in ELSS funds also involves some risks that you should be aware of before investing, such as:
- Market risk: ELSS funds are subject to market fluctuations and volatility, which can affect their NAVs and returns. The performance of ELSS funds depends on various factors such as economic conditions, political events, corporate earnings, etc., which are beyond the control of the fund manager or investor.
- Liquidity risk: ELSS funds have a lock-in period of three years, which means that you cannot withdraw or redeem your units before completing three years. This can be a problem if you need money urgently or want to exit from a poorly performing fund.
- Taxation risk: ELSS funds are taxed as long-term capital gains (LTCG) at 10% if the gains exceed Rs. 1 lakh in a financial year. This can reduce your net returns from ELSS funds. Moreover, the tax rules and rates are subject to change by the government, which can affect your tax liability and returns.
How to invest in ELSS Funds?
You can invest in ELSS funds through various modes and channels, such as:
- Online: You can invest in ELSS funds online through the websites or apps of fund houses, intermediaries, platforms or aggregators. You can compare different ELSS funds, check their features and performance, and invest in them with a few clicks. You can also track and monitor your investments online and get regular updates and statements.
- Offline: You can invest in ELSS funds offline through the physical offices or branches of fund houses, intermediaries, banks or post offices. You can fill up an application form and submit it along with the required documents and cheque or cash payment details. You will receive an account statement confirming your investment and allotting you units of the ELSS fund.
- Direct or regular plan: You can invest in ELSS funds either through a direct plan or a regular plan. A direct plan is where you invest directly with the fund house without any intermediary or commission involved. A regular plan is where you invest through an intermediary such as a distributor, broker or advisor who charges a commission from the fund house. A direct plan has a lower expense ratio than a regular plan, which means that it has higher returns than a regular plan.
ELSS funds are a great option for investors who want to save tax and earn higher returns over the long term by investing in equity markets. ELSS funds offer tax deduction of up to Rs. 1.5 lakh under Section 80C and have a lock-in period of only three years. However, ELSS funds also carry market risk, liquidity risk and taxation risk that you should consider before investing in them. You should choose an ELSS fund that suits your risk profile, investment objective and time horizon, and invest in it through a mode and channel that is convenient and cost-effective for you.
We hope this article has given you some insights into ELSS funds and how to invest in them. Please remember that this is not financial advice or recommendation and you should do your own research before investing in any fund.
DISCLAIMER – Mutual fund investments are subject to market risks; take expert opinion before investing