What are ELSS funds
ELSS is an acronym for an equity-linked savings scheme. They are the financial instrument which is used to create wealth in the long run in a tax-efficient manner.
3 major features of ELSS funds
ELSS is an equity fund
ELSS is an equity mutual fund, which means that it predominately invests in the equity market ( shares ). As investment in shares is related to market risk, investing in ELSS is also related to market risk. Like any other equity fund, ELSS does not provide any guarantee of returns. Returns can be negative also if the market does not perform well.
Tax exemption under 80/c with 3 years of lock-in
The best part of ELSS funds is that they provide tax exemption under section 80/c of the Indian income tax act, which is for 150000 ( one lac fifty thousand rupees only). You are allowed to invest more than 1.5 lacs in ELSS in a financial year, but only up to 1.5 lacs will give you the tax benefit.
If you have already invested some amount in tax savings schemes, you can invest remaining in ELSS. For example, if you have invested in tax saving FD for 1 lac rupees, you can consider investing 50 thousand in ELSS.
Another advantage of ELSS is that it provides 3 years of lockin period which is least in all the tax-saving instruments. After 3 years you can withdraw your full amount.
Creates wealth in the long run
As ELSS is a tax-saving equity mutual fund, it creates wealth over the long term like any other good equity mutual fund. After 3 years of lockin is over, ELSS is like a normal equity fund. You can evaluate it and make a decision to hold on to your investments or to take profits.
TOP 3 REASONS WHY YOU SHOULD INVEST IN ELSS
ELSS offers one of the best opportunities to invest in equity funds and save tax at the same time. Here are the 3 main reasons why you should consider ELSS as your investment choice:
TAX EFFICIENT AND HELPS TO CREATE WEALTH
As said earlier ELSS helps you to save up to 1.5 lacs under section 80/c in tax, while at the same time it helps to build your wealth. While investing in ELSS you have 2 options to choose from, dividend or growth. If you want to get wealth in the long run, then you should go and choose the growth option. If you are looking for money at some intervals, then you may choose to go for a dividend option.
HELPS IN FINANCIAL PLANNING
As ELSS helps you build wealth over a long period of time, it can be used as a financial planning tool. For example, if you want to buy a house after 10 years. To fulfill this goal you can invest in ELSS and keep the money for that duration. Any long term goal like child education, marriage, your retirement can be planned using this instrument.
If you have some short term goals then do not take this investment route, as in any case your funds will be blocked for 3 years.
STARTING POINT TO INVEST IN EQUITY FUNDS
ELSS is a very good tool to start your journey into equity-oriented mutual funds. It gives you better post-tax returns. By investing in ELSS you will understand the importance of investments in equity-oriented funds. Starting capital could be as low as 500 rupees per month.
As the equity markets are down in the current year, it makes sense to invest in a lump sum in ELSS if you still have not planned for your tax savings. Over a long period, you can safely assume the return to be in the range of 12-15 % compounded annually. Returns also differ from different fund house scheme.
While selecting the fund house please check its past performance, the expense ratio of the fund, securities in which the funds have invested currently, fund manager of ELSS. After your research is done invest with peace of mind and reaps the benefits.