All you need to know about ELSS

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Equity Linked Savings Scheme popularly known as ELSS is the best tax saving Mutual Fund. Under Section 80C, ELSS provides tax-deduction of up to Rs.1.5 lakh. These scheme has a lock-in period of 3 years from the date of units allotment. The units are free to redeemed or switched after the lock-in period. Under this scheme, more than 65% of the portfolio is invested in equity which leads to capital gains and tax saving. ELSS is suitable for all categories of investors.

ELSS with different options

Like other equity fund, ELSS have both growth and dividend options.

In dividend scheme, when dividend is announced by the fund house, investors get a regular dividend income, even during the lock-in period.

In growth scheme, investors get a lump sum amount after the lock-in period of 3 years.

Features of ELSS

Following are some of the features of ELSS investment-

  • ELSS has lock-in period of 3 years. It means that, you cannot redeem  the fund before 3 years. It is better than other tax-saving alternative.
  • ELSS is a diversified equity mutual fund and the majority of the corpus is invested in equities which include large cap, small cap, and mid cap.
  • Returns from ELSS fund reflect returns from the equity markets, as it is an equity fund.
  • Historically, ELSS generates the highest returns among the tax-saving investment alternatives.
  • The flexibility of investment through SIP (Syatematic Investment Plan) or one-time investment (lump-sum) in ELSS fund is available.
  • No entry or exit load is there.
  • ELSS funds provides 2 options- Growth and Dividend option.
  • ELSS is best suited for long term equity investments.
  • The expense ratio of best ELSS-tax saving mutual fund ranges from 2-3%.
  • ELSS investment is possible via online as well as offline mode.

Things to Remember before ELSS Investment

There are specific things to remember before investing in ELSS fund-

  • Long-term performance of the fund.
  • Lock-in period of the scheme.
  • Maximum returns to be expected
  • Investement approach of the fund manager
  • Expense ratio of the fund
  • Tax-deduction limit
  • Portfolio of the fund
  • Volatility of the fund

Advantages of ELSS- tax saving mutual fund

  • The lock-in period of ELSS is 3 years which is lower than other tax-saving instruments like- National Savings Certificate (NSC), bank fixed deposits and Public Provident Fund (PPF).
  • Under Section 80C of Income Tax Act, ELSS investment is tax-deductible from taxable income.
  • ELSS funds invest mostly in equities. It involves short-term volatility which enhances the wealth of the investor.
  • During the investment period, dividends from ELSS funds are tax-free. Profits on the sale of ELSS units are tagged as long-term capital gains, which is tax-free.

Investors in ELSS Fund

Here, we will have a look at the investors who should invest in ELSS fund.

  • Investors who are willing to invest for a time horizon of 3 years or more.
  • Under Section 80C, investors willing to get tax deductions.
  • Investors who are looking for wealth creation for a long-run.

Methods suitable for ELSS Fund

You can invest in ELSS fund through lump-sum amount and through SIP (Systematic Investment Plan).

But the best method is SIP.

  • Through SIP, investor invests a certain amount of money at a regular interval.
  • SIP helps investors to benefit from the volatility in the stock markets by rupee cost averaging. Also, helps in enjoying the benefit of compounding.
  • SIP of ELSS fund provides best hybrid of capital appreciation and tax savings.
  • The minimum SIP in ELSS is Rs. 500 which is barely minimum.

ELSS is more or less a diversified equity fund except the lock-in periods and tax-deduction benefits. It is to be noted that, you should not invest in a new scheme every year to save taxes, while investing in ELSS. It invests in equity shares of companies across sectors and market capitalisations. So, the best tax-saving mutual fund investment alternative is ELSS.

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