What is ELSS and What are its Advantages?

In your journey towards wealth creation, investments are of paramount importance. Depending upon your individual financial requirements along with the overall goal of wealth creation you have several options when it comes to investing your hard-earned money. Generally, you can invest in asset classes of three broad categories: high-risk investment like equities, low risk investment like fixed deposits or government bonds and lastly, tax saving mutual funds.

  • The last category, or Equity-linked Savings Scheme (ELSS) has become one among the most popular modes of investment in India.

Statistics pertaining to ELSS funds in India:

  • According to the data from Association of Mutual Funds in India (AMFI), ELSS mutual funds net inflows stood at Rs 1,986 crore in 2018. The net inflows were Rs 1,244 crore and Rs 931 crore in 2019 and 2020 respectively.
  • According to market experts, the net inflows might have decreased because of the lukewarm performance of ELSS funds in the last 2 years vis-a-vis the high returns posted earlier.

What is ELSS?

Equity Linked Savings Scheme is an equity based mutual fund, which provides you with tax-benefits under Section 80C of the Income Tax Act. ELSS Mutual Funds have a minimum lock-in period of three years.

Who should invest in ELSS?

  • If you are someone who has just started earning, and are looking for a safe and reliable investment, then you could consider ELSS.
  • If you want only to invest in low-risk investment, then you should consider ELSS funds.
  • If you are a high-risk investor looking to diversify your portfolio with some form of tax-savings, then consider ELSS.
  • People of any age-group can invest in ELSS Mutual Funds. In fact, market experts suggest investing in three-four high performing ELSS funds.

Advantages of ELSS Mutual Funds:

Here is a look at the advantages of these funds:
  • Tax Savings:

    ELSS funds are the only type of Mutual Funds eligible for tax deductions. You can avail tax deductions upto Rs 1.5 lakh in a year by investing in the scheme. Section 80C of the Income Tax Act allows tax deductions on these funds.
    Even after the new tax regime, where long-term capital gains from ELSS above Rs 1 lakh are taxable, these funds are one among the best tax-saving options. These offer higher post-tax returns vis-a-vis other investment options like Unit Linked Insurance Plans (ULIPs) or Public Provident Fund (PPF).
  • Short lock-in period:

    Once you invest in ELSS funds, they remain locked in for a period of 3 years. Other investments like Public Provident Fund (PPF), Employees Provident Fund (EPF) and National Savings Certificate (NSC) have a minimum lock-in period of five years. A lock-in period also inculcates investor’s discipline.
  • Can provide long-term return:

    Though the funds are locked-in for a period of three years, you can allow the funds to grow further by not redeeming it after the stipulated time. As these funds invest in equities, over a period of time, it can help you create considerable wealth.
  • Inculcates the habit of saving:

    You can invest in ELSS schemes with a minimum of Rs 500 per month. This is also known as the Systematic Investment Plan (SIP) in ELSS schemes. Thus, with minimum investments on a monthly basis, you can watch your wealth grow. What’s more the investments will be exempt from taxation.
  • Higher returns:

    : As these funds invest primarily in equities, you will, invariably, receive higher returns from the market. As per market experts, ELSS funds can get you returns which are twice or more than a simple savings scheme. Statistics reveal that ELSS, on average, generates around 12% returns over a period of 10 years. This is a significant increase vis-a-vis schemes like PPF, which generate around 8%.

Types of ELSS:

As an investor, you must be aware of the types of ELSS funds. These are:
  • Growth Fund:

    This is a long-term wealth creation platform for investors, where full value of funds is realised at the time of redemption.
  • Dividend payout:

    Here you have two options: Dividend payout and dividend reinvestment. In the case of dividend payout, you will receive tax-free dividend, while in the case of latter, your dividends will be reinvested.

Conclusion

Thus, ELSS Mutual Funds are among the best investment options, which provide higher returns with a short lock-in period. The best part is the tax-savings offered by the scheme.

A diversified portfolio is the key to wealth creation and ELSS is a must-have financial instrument for every portfolio. To make investing and maintaining your financial portfolio easier, you can open a Demat account in India. The benefits of Demat Accounts are manifold, but the prime plus point is being able to view all your entire portfolio in one go. So, take the first steps towards your long and profitable investing journey by opening your Demat account.

Open Demat Account at IIFL