What is ELSS and its Advantages?

In your journey towards wealth creation, a carefully created investment plan is very important. Generally, you can invest in asset classes of three broad categories: high-risk investment like equities, a low-risk investment like fixed deposits or government bonds and lastly, tax saving mutual funds. Today, tax saving mutual funds or the Equity-linked Savings Scheme (ELSS) is one of the most popular investments in India.

Statistics pertaining to ELSS funds in India:

  • According to the data from the Association of Mutual Funds in India (AMFI), ELSS mutual funds 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 average performance of ELSS funds in the last 2 years contradicting the higher returns 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
  • If you want only to invest in low-risk safe investment
  • If you are a high-risk investor looking to diversify your portfolio and save tax.
  • People of any age group can invest in ELSS Mutual Funds. 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 of about 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 3 years unlike other investments like Public Provident Fund, Employees Provident Fund and National Savings Certificate which have a minimum lock-in period of five years.
  • Can provide long-term return:

    Funds can be grown by not redeeming them after the stipulated lock-in time of three years. As these funds invest in equities, considerable wealth can be created over some time..
  • Inculcates the habit of saving:

    You can invest in ELSS schemes with a minimum of Rs 500 per month, also known as the Systematic Investment Plan (SIP). Thus, with monthly minimum investments, you can watch your wealth grow
  • Higher returns:

    As these funds invest in equities, they receive higher returns from the market. ELSS funds can get you returns that are twice or more than a simple savings scheme. Statistics reveal that ELSS generates around 12% returns over 10 years on average. 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 the full value of funds is realised at the time of withdrawal.
  • Dividend payout:

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

Conclusion

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

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 include viewing your entire portfolio in one go. So, take the first steps towards your long and profitable investing journey by opening your Demat account

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