What are ELSS Mutual funds and how can ELSS Mutual funds help you grow your wealth? Let us find out here:
“Do not save what is left after spending but spend what is left after saving.”
Thanks to the mentality to save instilled right from a young age in India! When talking about the opportunity to save, we have different options. One such option is Tax-Saving Mutual Funds. These are shortly referred to as ELSS.
What Are Tax-Saving Mutual Funds?
These are diversified equity funds. The money you invest in these funds is invested in stocks. These investments are made in particular proportion based on your investment goals. Tax-saving mutual funds are similar to any other types of mutual funds. But, the difference is that your investment in these funds will bring you tax benefits. In particular, you can get exemptions under section 80C.
What Makes ELSS Mutual Funds Special?
In Tax-Saving Mutual Funds, your fund manager will choose stocks after carrying out in-depth market research. He will carry out this research to deliver the utmost risk-adjusted portfolio returns to you. As compared to other investment options, the ELSS stands unique. One of the key factors that make it unique is the short lock-in period of three years.
Why Should You Consider ELSS or Tax Saving SIP?
Choosing these funds for your investment is a good idea. The reason is that they can make you eligible for a tax deduction of up to Rs.1.5 lakh. You can claim this deduction under 80C section of the IT Act. In turn, you can bring down your tax liability. The reason is that the amount you invest in these funds is deducted from your taxable income.
Here are some key features that make ELSS special:
- ELSS Mutual funds invest a major portion of your funds in equity. To gain a better understanding about equity, you can visit our Mutual fund article.
- ELSS Mutual funds have a compulsory lock-in period of three years. This is the shortest period among the other tax-saving instruments in the market.
- Apart from tax-saving benefits, they can bring you capital appreciation from your investment.
- Do you wish to get regular income from your ELSS Investment? You have the option to choose dividend pay-outs. Otherwise, you can also choose capital appreciation to get funds in a lump sum for your future.
- You are relieved of exit or entry load when you choose ELSS as your tax-saving option
- In the long run, you can expect 10-12 per cent returns. You can get this when you choose good ELSS funds for your investment. These returns are the highest in the tax-saving category of instruments. Nevertheless, ELSS carries some risk as well due to equity investments.
Tax Benefits You Can Expect from an ELSS Investment:
You can claim a deduction under section 80C of the Income Tax Act for the principal money you invest in an ELSS scheme. You can claim a deduction of up to Rs.1.5 lakhs as per this section of the IT Act in India.
As mentioned earlier, ELSS Schemes have a compulsory lock-in period of three years. So, when you redeem, you will get long-term capital gains from these schemes. The good thing here is that these gains are not taxable. However, this exception is applicable only until Rs. 1 Lakh per financial year. Any gains more than this value will be taxed at 10% without indexation.
Benefits of ELSS over other Investment Schemes:
Are you wondering whether to choose ELSS or other investment schemes? Then, understanding the benefits of this investment option as against others will help you decide:
- ELSS has the shortest lock-in period compared to PPF, NSC and SCSS
- Potentially higher returns as the returns are market-linked. But, in other schemes like bank FD, you can expect only a fixed return.
- You can expect better post-tax returns from ELSS Schemes. Many investors were able to get long-term capital gains of Rs. 1 lakh per year from these schemes.
- ELSS schemes can help you with wealth-generation. Do you know how? The corpus funds that you generate from these schemes can help meet your financial goals.
Comparison of ELSS with Other Tax-Saving Schemes:
You can gain a better idea of the benefits of ELSS over other schemes from the table below:
| Investment Instrument | Tax Free Gains | Returns | Lock-in period (in years) | Risk/Safety |
| Employee Provident Fund | Yes | 8.50% | Until 60 years | Low Risk |
| National Pension System | Partially | Variable | Until 60 years | Moderate Risk |
| Life insurance premiums | Yes | Variable | At least 5 years | Moderate Risk |
| Equity Linked Savings Scheme (ELSS) | No | Market-Linked | 3 years | High Risk |
| Bank FD | No | 6.20% | 5 Years | Low Risk |
| PPF (Public Provident Fund) | Yes | 7.1% | 15 Years | Highest Safety |
| NSC (National Savings Scheme) | No | 6.8% | 5 Years | Highest Safety |
| SCSS (Senior Citizens Savings Scheme) | No | 7.4% | 5 Years | Low Risk |
Source: SBI Mutual Fund
Investment Mode:
When you choose to invest in Tax-Saving Mutual Funds, you have two choices. You can choose SIP or lump sum mode.
As stated in our SIP Vs. lump sum mode article, SIP investment could be the better choice in most instance. Nevertheless, you can choose lump sum mode when the market is in bearish trend. Also, you can do this when you are ready to invest for a longer. Also, choose lump sum mode only when you are ready to take higher risks.
Who Should Invest In ELSS Schemes?
Now, you know that ELSS schemes are beneficial in many ways. However, the returns are market-linked. It means that based on the market, the returns can either increase or decrease from the money you invest. So, it is a high-risk investment. It is the most suitable investment option for aggressive investors, who are particular about wealth creation in the long run.
As these schemes carry a lock-in period, you should be ready to stay invested for three years. Also, you should make your financial plans accordingly. To save taxes, investors in higher tax brackets can benefit from these schemes for sure. Also, without the benefit of indexation, gains of more than Rs.1 Lakh are taxed at 10%. So, if you have long-term financial goals, you can choose this scheme. Using this investment, you can plan for your child’s education and even your retirement.
