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Why ELSS should be your first Mutual Fund?

Most individuals invest in savings, fixed deposits, or other investment schemes. But these are traditional ways of saving money with meagre returns. While if you want to avail yourself of better returns, it is time to leap into mutual fund investment. Most people who are new to mutual fund investments prefer to begin with Equity Linked Saving Scheme.

A quick brief on ELSS funds

An ELSS fund (Equity Linked Savings Scheme) is the only kind of mutual fund permitted for tax deduction with respect to Section 80C of the Indian Income Tax Act, 1961. An individual can claim a tax rebate of up to ₹ 1,50,000 and save up to approximately ₹ 46,800 a year in taxes just by investing in ELSS funds.
 

Investing in an ELSS fund is accompanied by the dual benefit of wealth accumulation and tax deductions. These mutual funds have a lock-in period of three years, which is the shortest amongst all tax-saving investments with high return offering potential under Section 80C options.

Why ELSS should be your first mutual fund:
 

     

  1. You can begin by investing as little as ₹ 500

    You can invest a fixed amount in ELSS monthly via a Systematic Investment Plan (SIP) as choosing monthly SIPs will help you kick start your ELSS investments with as little as ₹ 500. This is beneficial for first-time mutual fund investors who cannot afford to invest huge amounts all at once.
     

    Moreover, the option of investing via SIPs promotes the habit of regular savings and helps the continuation of investments every month, even after the lock-in period ends. Equity investment can assist you with great returns and help you build adequate savings toward your long-term. goals.
     

  2. You can save up to ₹ 1.5 lakh in taxes in a year

    One of the biggest advantages of ELSS investments is the tax benefit. This mutual fund scheme allows one to save up to ₹ 1.5 lakh per year under Section 80C of the Indian Income Tax Act, 1961. ELSS is the only option that offers tax-saving in the mutual fund category.
     

  3. It enables you to invest in a diverse portfolio.

    ELSS is an equity-diversified mutual fund scheme that comprises varied multi-cap funds. This indicates that one can invest in multiple companies and sectors. Hence, you have the flexibility to change the portfolio as per market conditions as the investor.
     

    A portfolio of diverse nature helps spread the risk and increase your chances of better returns. 
     

  4. You experience the risk-return ratio

    ELSS comprises a large proportion of equity funds that are considered risky. This scheme consists of a 3-year lock-in period which evens out the market volatility during the interim period. An ELSS mutual fund consists of a majority of large-cap stocks that are considered stable, ensuring there is no imbalance in returns even during market fluctuations.
     

  5. Opportunity for better returns

    Compared to other tax-saving options available under Section 80C, like pension schemes, recurring deposits, and fixed deposits, ELSS renders better returns at the rate of 12% per annum and offers tax benefits as well. 
     

    It helps you beat inflation without any hassle owing to the potential of equities and also helps you plan your investment goals accordingly.
     

  6. You can avail of professional assistance

    The best way to invest in ELSS is through an asset management company or professional fund manager since these entities are well-versed in the market and its flow. For a first-time ELSS investor, acquiring proper professional guidance and support is important to ensure their money is in safe and knowledgeable hands.
     

    Moreover, the expense ratio of managing ELSS is cost-effective, wherein the ratio measures the per unit cost of managing the fund. Hence, a lower expense ratio means high profitability.

Conclusion

These are some of the many reasons why an ELSS should be your first mutual fund investment. If you want to shift your focus to mutual funds, the Equity Linked Savings Scheme is the right first step. If you are a newbie in the investment world, you might need help with a strong grasp of the market and its volatile nature. Hence, you can choose a systematic route to begin investing in an ELSS scheme wherein you can invest a pre-determined amount at frequent intervals over a pre-determined and regular tenure.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Why does ELSS have a 3-year lock-in period?

ELSS fund investments are subject to a 3-year lock-in period imposed by the Central Board of Direct Taxes for the applicability of tax benefits. Moreover, the lock-in period is a part of the fund’s structure, just like other tax-saving investment schemes. However, ELSS has the least lock-in tenure compared to other tax-saving investment options.

When can one redeem ELSS funds?

It is not mandatory to redeem an ELSS investment after the completion of the three-year lock-in period. It can be continued for a longer period as well. However, if you need to redeem the funds, the process can occur once the mandatory lock-in period of 3 years is complete.

While lump sum investments can be redeemed after three years, each investment is locked in for a period of 3 years for SIP investments.

Should one wait for the market to rise or fall to invest in ELSS schemes?

Since an ELSS scheme renders income tax benefit complying with Section 80C of the Indian Income Tax Act, one is advised to invest in these schemes at the beginning of the financial year to plan tax and other finances in advance.