Why Do We Need ELSS Funds?

• 1 March 2017 | 1404 Views | By Mint2Save

Equity Linked Savings Scheme (ELSS) offers a easiest way to avail tax benefits and at the same time get an opportunity to gain from the potential of the Indian equity markets. These are tax-saving mutual funds that an individual use to save income tax of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. They are one of the best tax-saving investments that are accessible at present; many people tend to ignore them because they are probably not as simple to know as some of the traditional tax-saving investments like Public Provident Fund (PPF) or Tax-saving Fixed Deposits. Nevertheless, Equity Linked Savings Scheme funds are highly-recommended by tax and investment experts. ELSS funds have a lock-in period of 3 years and invest a majority of their portfolio in the stock market. The returns generated on the investments are also tax-free for investor after completion of lock-in-period of 3 years. ELSS funds are one of the most preferred investment cum saving models to save tax or get tax benefits under Section 80C. This is because the investor also gets the potential upside of investing in the equity markets along with the tax deduction Earning potential is high as it is an equity linked scheme.

The biggest advantage is that ELSS funds don’t have a maturity date because of such you can continue investing in them even after the lock-in period of 3 years has expired. An individual investment in an Equity linked savings scheme can be continued with or without further contributions. Here you earn returns from the power of compounding interest.

Where you generate returns on not only the amount you invest but on your earnings as well is Compound Interest. For example, you invested Rs 1,000 through SIP in an ELSS fund and your annual return from it was Rs 100 or 10%. This interest earned will be added to your invested amount and would generate returns too. So, subsequently in another year, you would earn returns on Rs 10,100 accumulated in the first year as well as the new Rs 10,000 invested that year. After a long time (3-6 years of regular investment) , this effect of compounding becomes even more profitable as more you invest; the more interest is added to your amount. Even if you stop investing further, you keep generating returns on the invested money.

The risk is higher in ELSS funds because you cannot exit before three years and an ELSS fund does not guarantee returns because they earn from investments in the equity market. The only drawback is ELSS is equity based investment and thus linked with market risk. Though, investors must consider age and risk appetite. An ELSS investment can be started with a minimum amount of Rs 500. Even though, there is no cap on maximum of investment in ELSS, tax benefits can be availed upto Rs. 1.50 Lacs/year.

One of the USP of ELSS scheme is the availability of multiple mutual funds to invest in. Unlike PPF, NSC, KVP or other 80 C investment modes, ELSS provides multiple fund houses from which an investor can choose. Adding more attractiveness to the scheme is the idea of switching. This means that if an investor is not satisfied with the fund performance, he can stop his investment in that ELSS and switch to a better performing ELSS scheme.

Diversification is a significant feature of equity mutual funds. You can also diversify in investment styles and across fund houses by putting your money in more than one ELSS fund. For example, you plan to invest Rs 1 lakh in one year in ELSS funds to earn the tax break under Section 80C; you can extend your investments in 2-3 ELSS funds rather than putting all the money in one single fund.

ELSS funds fall under the category of the exempt-exempt-exempt (EEE). You don’t have to pay tax on the amount invested in the ELSS fund as investments get a tax deduction under 80C. As the investments are not withdrawn, the capital gains created by the fund are also exempt from tax. Finally, withdrawals also become tax-free because there is no tax payable on long-term capital gains from equity-oriented mutual funds. Since, ELSS mutual funds would help you to grow your money when the stock market grows over a period of time.

Summing up, ELSS funds can be considered as an ideal tool for wealth creation, to earn money, for growth and as a tax-saving option. However, investors must make the proper choice or right decision of schemes to invest in. Though there is no age to start investing in ELSS, it is a good investment to have for those who are just starting their careers.