4 Benefits of ELSS Funds That Are Essential to Keep in Mind

January 25, 2023

Many people are familiar with the term ELSS funds. Basically, it stands for Equity Linked Savings Scheme. These are specialized forms of mutual funds that deal in equity instruments and ensures different tax benefits on both dividends and capital gains earned by an investor. Apart from assuring the tax benefits to the investors, the ELSS also offers the advantage of capital appreciation. 

This type of funds comes with 2 investment options: Growth and Dividend. These are the best to choose to meet your long-term financial goals. The ELSS schemes mainly invest in all kinds of equity instruments and the performance provided is market-linked. In order to increase the returns, a combination of large-cap, mid-cap, and small-cap companies are chosen. However, the choice of companies depends upon the portfolio manager. More and more people can be seen opting for the ELSS scheme than other 80C instruments owing to several benefits associated with it. Some of the benefits listed below will help you know more about ELSS and aid you to decide whether it is worth investing or not.

4 Major Benefits of ELSS Funds: -

1. Helps Save Tax: -

The substantial tax benefit is the primary advantage associated with ELSS Funds. According to section 80C of the Income Tax Act 1961, a debit of Rs. 1.5 lakh from total income tax can be benefited by investing in this type of funds. While calculating the amount to be deducted from the income tax, factors such as dividend distribution tax and gains from capital appreciation are also taken into account.

However, one should note that long term capital gains that are earned from the ELSS mutual funds are accountable to deduct taxes at the rate of 10% without any indexation. This is the first benefit of ELSS carrying on to the next benefit which will exceed your expectation of ELSS funds.

2. Low Lock-in Period: -

An ELSS comes with a 3-year lock-in period, which implies that the units cannot be redeemed or switched before the completion of three years. Though it might seem a negative aspect, the three-year lock-in period instills a good habit in the individuals to stay invested for a longer period. Moreover, compared to other investment instruments the ELSS has a low lock-in period. This type of funds are usually equity mutual fund schemes that invest in stocks. No doubt they are risky but they offer superior returns. The ELSS category has offered returns of 18.50% over the last 5 years. It comes with a mandatory lock-in period of 3 years. However, you need to invest with an investment horizon of 5 to 7 years. 

3. Higher Returns: -

The total returns obtained from ELSS schemes is comparatively higher than all other equivalent investment tools, such as tax-saving fixed deposits, NSC (National Savings Certificates) and PPF (Public Provident Funds). As ELSS mutual funds are equity-oriented, the returns are high compared to fixed income instruments. Additionally, the dividends earned from the ELSS scheme can be reinvested into multiple mutual funds or redeemed. However, it should be noted that any amount reinvested in the ELSS gets locked for a tenure of three years. 

4. Multiple Investment Methods: -

Individuals can invest in ELSS in a fixed amount, or through SIPs (Systematic Investment Plans). It is completely an investor’s choice. This serves as an attractive feature of the ELSS among all groups of investors, as it lets individuals with fewer funds to make profits in the stock market. Investors can select the SIP method with a minimum amount of Rs. 500. With an investment as low as this, you can invest without having to gather reasonable assets. SIP or systematic investment plans are akin to recurring deposits for ELSS investments and currently, this route has emerged as the key driver of equity mutual fund investments in India. For starters, a SIP allows you to invest over the long term in small installments so you do not need to worry regarding upsetting your monthly or annual budget. SIP is also suitable for individuals who tend to have trouble saving as the amount gets debited automatically from your bank account. This way you will end up saving money for the future instead of spending it all.


Source: www.nirmalbang.com


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