The equity-linked savings scheme has become a preferred investment choice for compounding wealth and saving money. Besides, it provides the investor with certain tax benefits while creating an opportunity to earn high returns. However, before taking the plunge into ELSS funds, there are a few factors that one must take into consideration. Let's analyse these through this blog.
Understanding equity-linked saving scheme
ELSS is one of the most preferred fund investment options that investors consider. Here, the investor's money goes into various money market instruments. A significant portion of this money goes into equity and other related instruments. The remaining portion is mostly invested in gold, debt funds, etc. The best part of this investment is that the investor qualifies for tax exemption under section 80c of the Income Tax Act. At the end of every year, one can receive tax benefits of about ₹1.5 lakh on their investment. Following are some of the notable features of less funds.
ELSS mutual funds qualify for tax exemption under section 80c. Investors can get a rebate of about ₹1.5 lakh every year.
It is a high-risk investment as the portfolio mostly invests in equity funds. A portion of the investment goes into sector capitalisation and themes for portfolio diversification.
There is a lock-in period of 3 years, and premature exit is not allowed. On the other hand, out of all the tax-saving schemes, ELSS mutual funds have the shortest lock-in period. Other schemes have a minimum lock-in period of 5 years.
You have the option to start with SIP investment. Lump sum investment is also possible in the equity-linked savings scheme. However, the minimum amount can differ depending on the asset management company or fund house.
Important factors to consider before investing in ELSS
Investing in ELSS through sip
SIP or Systematic Investment Plan is an excellent way of regularly investing small amounts in a mutual fund plan. It provides the benefit of the rupee cost average method to eliminate the average purchase cost for mutual fund units. While these are usually considered an excellent way of investing, they prove even more beneficial to market fluctuations.
In a SIP scheme, one is likely to invest a specified amount at regular intervals to purchase units with a specific NAV. Hence, when the market is falling, one can purchase units progressively to keep the cost of purchase balanced. It is important to understand that ELSS funds have a lock-in period. So, with a SIP plan, the investment will have a lock-in period of 3 years beginning from the month of investment.
Similarly, less investment through lump sum should be done only when the market is low. Investing a large amount during the Bull market will make every unit much more expensive. Many investors end up investing in elss tax saving in the hope of saving taxes. However, the best practice is to focus more on the changing market trends. It is best to plan the investment at the beginning of every financial year, starting with a SIP and ending with a lump sum.
As this investment has a lock-in period of 3 years, the earnings are categorized as a long-term capital gain (LTCG). LTCG from equity fund has a tax exemption of about ₹ 1,00,000. Hence, the investors benefit from the same, as long as the amount is not withdrawn
As discussed, ELSS tax saving comprises investing in equity instruments; hence the risk is relatively higher than other tools. However, fund managers provide top ELSS funds with different risk levels to suit different investors. It is always recommended to choose investment options depending on risk appetite and financial goals.
Growth and dividend
Investors in the ELSS scheme can choose the dividend or growth option. With the dividend option, they can get regular income until they remain invested. Similarly, the growth option has option of putting the earnings into buying more units for capital growth. It helps increase profits, especially when the market is good.
ELSS is a type of equity mutual fund that gives investors the benefit of wealth building and tax saving at the same time. Investors concerned about reducing their tax liability without losing capital growth should consider this investment. The tax efficiency and smaller lock-in period make it an excellent choice among investors. However, one must have a significant risk appetite before investing in ELSS. The equity-linked savings scheme portfolio mostly comprises equity-related instruments and is highly volatile. Mutual fund experts and managers take a professional approach to managing top ELSS funds. Investors looking for exponential growth, returns, and tax exemption should go for ELSS through the SIP scheme. It gives the best benefit of average cost, low investment, and, most importantly, compounded growth.