What are Equity Linked Saving Schemes (ELSS)?

28 February 2017 | 1922 Views | By Mint2Save

Starting from basics, if you are choosing a mutual fund as a tax saving instrument, then it will be termed as ELSS. Equity Linked Saving Scheme is introduced to promote the cash flow in the equity market.

Since, ELSS is based on equity, the returns may fluctuate. It may be possible that a scheme which was providing 40% return in present month will give a huge loss in the upcoming month. But don’t be so afraid, as in the long term, you will always have a chance of good returns.

The risk reward ratio is very high in mutual fund. There are two ways to enter in ELSS:

Fixed type or Lump Sum Investment
Systematic Investment Plan (SIP)

The Figure below describes about area diversification of ELSS.

Definition

“ELSS is equity linked saving schemes which are mutual funds which are aimed to provide tax exemption u/s 80c. If you can invest in top ELSS mutual funds, you can get 13% to 15% returns every year apart from the tax benefit of upto Rs 1.5Lac u/s 80C. Other tax saving schemes provide up to 8% returns, hence these have become popular tax saving schemes.”

The combination of equity and tax-saving makes ELSS funds an ideal investment for all types of investors.

Good for Those

Who want to save income tax and also want to take advantage of growing their money
ELSS for senior citizen is advantageous. For senior citizen with taxable income, ELSS funds are a profitable option for tax-saving.
If you can invest in top ELSS mutual funds, you can get 13% to 15% returns every year apart from the tax benefit up to Rs 1.5 Lac u/s 80C.

Lock-In Period

“ELSS schemes have a lock in period of three years (after 3 years you can put your money as many years as you want), which happens to be lowest lock in period among all the options available under section 80 C.”

Lock-in period plays a very different role, when the investment strategies vary from lum-sum to SIP. When invested in lum-sum, the amount, along with the earnings, automatically comes back to the bank account after it completes its three year investment cycle.

When invested in a regular investment plan, like monthly or quarterly SIPs, you can back the returns in the account just the way you have invested it. This means that if invested on a monthly basis, you will get the returns after each instalment of investment completes its 3 years of investment.

Common Mistake

“Savers sometimes think of ELSS funds and ULIPs as alternatives. This is a mistake.”
Be aware when you are talking about equity you should be ready for variable return. Because the fund is directly used in the stock market.

Best ELSS Tax Saving Schemes

A lot of ELSS schemes are floating in the market, among which majority such as DSP BlackRock, Axis etc., have performed well above the market average. Investors, are though, always advised on not making decisions based on research and advises from financial advisors.