An equity-linked savings scheme, or ELSS fund, is one kind of mutual fund. People who invest in these funds can apply for tax deductions under Section 80C of the Income Tax Act of 1961. The best part of investing in an ELSS mutual fund is that you can claim a tax reduction of up to Rs. 1,50,000. Hence you can save up to Rs. 46,800 in a year in taxes alone.
An ELSS investment also comes with a lock-in period of just three years. This is the shortest for all mutual funds among section 80C investments. The ELSS mutual funds mostly consist of equities, but they also look at fixed-income securities.
Features of an ELSS Investment
An ELSS fund is an equity-based scheme. It comes with a mandatory lock-in period of three years. Taxpayers have shifted in recent years to lean toward ELSS funds due to their tax benefits. This is mostly due to the tax exemption of Rs. 1,50,000 that is offered by ELSS investments. Also, the income earned under this scheme will be considered as Long Term Capital Gain (LTCG) and will be taxed at 10% if the income is above Rs. 1 lakh.
Some of the features of an ELSS investment are as follows:
- There is no maximum duration for an investment. But there is a mandatory lock-in period of three years.
- The exemption of tax on the invested amount under Section 80C of the Income Tax Act.
- The funds are invested in equity in a very diverse manner. They are invested in themes, sectors, and market capitalizations.
- A minimum of 80% of the total investment collection is invested in equity and equity-related instruments.
Why You Should Start Investing in ELSS Mutual Funds
The wide range of benefits offered by ELSS funds include: –
- Diverse investments – ELSS funds invest in a diverse group of companies. This includes small capital, large capital, and various other sectors. This element of diverse investment adds a lot to your portfolio.
- The benefit of SIPs – SIP is a favorite method as it allows investors to invest small amounts. This is better than investing a large amount in one go, as you can avail tax benefits and create wealth.
- Minimum amount – You can invest in ELSS funds with as little as Rs. 500. You don’t have to collect large amounts of money before you start investing.
Who Should Invest in ELSS Funds
An ELSS investment is great for anyone saving up to Rs. 46,800 a year on tax exemption. It is recommended for people willing to take a certain amount of risk. They also have to be able to continue to stay invested up to a mandatory lock-in period of three years.
To get the best benefits from an ELSS fund, it is better to stay invested for at least 5 years. Five years allows your investment to go through the complete market cycle and give you the best returns.
It is also suitable for young investors because of the very low initial capital required. An ELSS fund is also great for beginner investors if they come in with a long-term plan. Young investors can also benefit from the time they have at hand. This allows them to take advantage of compounding and enjoy high returns.
How to Find the Best ELSS Mutual Funds
- Fund history– Consistency over the past 5 years is important in choosing an ELSS fund. The quality of stocks in a fund’s portfolio reflects its standard.
- Fund returns– Make sure that the fund has been consistent over the past years by comparing its performance with that of its peers. This information helps you pick from the recommended funds. But, it is not necessary that the past performance alone can speak for the fund’s future performance. The future mostly depends on market movements.
- Financial ratios – Criteria such as standard deviation, Sharpe ratio, alpha, and beta must be looked at to analyze a fund. Funds with a lower standard deviation and beta are preferred. Also, funds with a higher Sharpe ratio offer higher returns for the risk taken.
- Expense ratio – This tells you how much of your investment goes towards managing your fund. A higher take-home return comes from a lower expense ratio. So, if you have to compare two similar funds, choose the one that has a lower expense ratio.
What Makes ELSS Funds the Best Funds?
- Tax repayment and wealth growth – The ELSS fund is the only investment option that provides tax deductions under Section 80C of the Income Tax Act of 1961. An ELSS investment also aids in wealth growth. Excellent returns can be earned by staying invested for at least five years.
- Shortest lock-in period – Compared to other 80C options. ELSS has the shortest lock-in period of three years.
- Inflation-beating returns – ELSS mutual funds have the potential to offer inflation-beating returns. This makes ELSS stand out from other tax-saving options.
- Money management – ‘Fund managers’ are financial experts that handle mutual funds. This means that your money is managed by individuals who have great portfolio management skills. Their team of market researchers and analysts, picks the best-performing securities that benefit investors.
- Monthly investment strategy – You can invest in an ELSS mutual fund on a monthly basis with as little as Rs. 500. There is no upper limit to how much you can invest.
An ELSS mutual fund is the best choice for anyone looking to invest in mutual funds. Some of the best ELSS funds can help you not only save tax but also enjoy equity exposure in a controlled manner. For more financial help, reach out to the finance experts at Piramal Finance. They offer a wide range of blogs and articles on various finance topics to help improve your skills.