Equity Linked Savings Scheme (ELSS) is a category of mutual fund scheme that principally invests in equity and equity allied instruments to produce high returns.
What makes ELSS different from other equity mutual fund schemes is that an investment of up to ₹ 1.5 lakh in ELSS is suitable for deduction from taxable income in a financial year.
The statutory lock-in period for each SIP is 3 years. It is one of the mutual fund schemes which is eligible for tax deduction under section 80 (c) of the IT Act.
Benefits of Investing in ELSS
High returns
Since the equity-linked saving scheme is basically an equity scheme, it has the potential to provide faster returns in the long run. Although risky, investing in ELSS has the potential to deliver significantly higher returns than traditional tax-saving instruments. In addition, ELSS has the shortest lock-in period among all other tax-saving amounts.
Tax exemption
If your mutual fund savings provide a tax-saving opportunity, with high investment growth, what else can you ask for? ELSS allows you to save investment, as an investment, these schemes are eligible for tax rebate of up to ₹ 1.5 lakh.
Diversity
The investment portfolio of ELSS has a balanced allocation to various asset classes such as equity and debt securities. In addition, many funds diversify within the equity category, as well as allocate assets to large-cap, mid-cap, small-cap equity shares. Through ELSS, one can easily diversify their overall investment portfolio and effectively reduce market risk.
Business management of investment
As investment portfolios are managed by professional experts who are well informed about market sentiments and the functioning of capital markets, investors’ money is in safe hands. Even if you do not know much about the functioning of financial markets or lack of time to track the market, you can still avail returns from equity markets through investing in ELSS.
Disciplined investment
Investing in ELSS requires a minimum 3-year lock-in, which promotes investment discipline among consumers. For a more efficient disciplined investment approach, you can also invest in ELSS through a Systematic Investment Plan (SIP), which requires timely installments to the fund on a predetermined date. However, it should be noted that each SIP installment remains closed for 3 years.
Who Should Invest in ELSS?
ELSS provides an amazing opportunity to investors who want to reduce their tax liability with high capital growth. If you are looking for equity investment that will give significant returns in the long run, then you can opt for this fund.
The scheme is suitable for investors with long-term investment horizons (preferably over 3 years), as the fund has a minimum lock-in period of 3 years. Furthermore, it has been observed that equity securities perform well in the long run, and this mandatory lock-in period ensures that investors stay invested.
Underlying assets consist mostly of equity securities, which are quite volatile, it is important that the investor has a high-risk appetite to invest in ELSS and has a long-term wealth creation goal.
If you have already invested ₹ 1.5 lakh in various tax saving instruments under Section 80 (C), then it is advisable to select other equity funds that have no lock-in period. Or you can also consider other tax saving instruments that may fall under other sections to save tax such as Health insurance for self/spouse/parents or National Pension System.
