5 Reasons to Invest in ELSS Mutual Funds

With the introduction of long-term capital gains tax on equity mutual fund investments, including ELSS (equity linked savings schemes) investors have been unsure about the benefits of these investment forms. Since equity mutual fund investments can potentially generate high returns and have Rs. 1 lakh of annual long-term capital gains taxation threshold, these still have an edge over other investment forms.

Same is the case with ELSS funds. Investors prefer these for tax-saving purposes along with capital growth. In case you are wondering if ELSS has any significant benefits over traditional tax-saving investments, here are the top 5 reasons why you should choose ELSS.

What is ELSS?

ELSS funds or Equity Linked Savings Scheme are equity funds that invest their corpus mainly in equity or equity-related instruments. ELSS funds are also known as tax saving schemes since investors can get a tax exemption of up to Rs. 1.5 lakhs from annual taxable income as per the provisions of Section 80C of the Income Tax Act.

The asset allocation in ELSS mutual funds is generally 65% towards equity and equity-linked securities like listed stocks. Some funds also have exposure to fixed-income securities to some extent. These funds have a lock-in period of three years, shortest among all Section 80C tax-saving investments.

Top 5 reasons to invest in ELSS

1. Tax advantage

One of the main reasons why many investors prefer to invest in ELSS is to have a tax benefit from the investment. Here’s how:

1. Through ELSS investments, investors can get a tax deduction under Section 80C of the income tax act of 1961.
2. As ELSS investments are locked in for 3 years, gains from ELSS funds are categorised as Long Term Capital gains (LTCG). These capital gains are exempt from tax up to Rs 100000 in a year(inclusive of all equity gains). Gains of over Rs 1 lakh is taxed at 10%.
3. There is also a tax rebate for equity linked saving schemes (ELSS) u/s 80C of Income Tax Act 1961. As per this, one can invest in ELSS and get deduction up to Rs. 1,50,000/- from total taxable income.

All these put together help in effectively reducing an investor’s tax liability.

2. Comparatively higher liquidity

ELSS provides higher liquidity as compared to all other 80C investment options. For example, PPF has a lock-in period of 15 years and therefore very limited liquidity during the investment period. The minimum lock-in period of all non-ELSS 80C investments is 5 years. 

ELSS mutual funds come with a lock-in period of 3 years. Thus, while invested in ELSS, an investor’s capital is not locked up for long periods and they have an option to redeem their investment partially or fully post completion of the lock-in period. If an investor invests in ELSS through the SIP mode, it is important to remember that each SIP is locked in for 3 years. Therefore, investors must carefully plan their ELSS investment through SIP.

3. Long-term capital growth

While the lock-in period for ELSS is 3 years, an investor can remain invested for a longer duration to increase the chances of continued growth of the invested capital. Equity investments are subject to market risk and although these funds invest in equity, there are chances of higher returns combined with tax exemption, especially in the long term.

4. Promotes a habit of saving

ELSS allows investors to systematically invest through the SIP mode with as little as Rs. 500 per month. A portion of an investor’s savings can turn into investment as ELSS helps cultivate the habit of continued investing. With a lock-in period of 3 years, the returns from ELSS through SIP investment can be availed every month after the completion of 3 years of the first SIP. Apart from this, the returns are exempt from tax, thus allowing more profits in the hands of the investor.

5. Benefit of equity exposure

ELSS also provides investors with the benefit of exposure to equity investments. An investor can gain from the growth cycle of stocks by including ELSS investment in his/her portfolio. Through savings, one can gain about 6-8% returns, however, by investing in equity, there are chances of gaining higher returns, especially during favourable stock market performance. 

Conclusion

Like all investments, ELSS has benefits and flaws. An investor must ensure to align personal investment goals with the fund objective while carefully considering individual risk appetite and investment horizon. Investments made after appropriate research can help investors fetch maximum financial gains.

With incentives like tax saves, conveniences of small monthly investments and chances of long-term wealth creation, ELSS makes for an ideal investment choice, especially for new investors. 

FAQs

1. Is it a good time to invest in ELSS mutual funds?
   The timing of investing in ELSS entirely depends on personal financial goals. Since ELSS primarily invests in equities, their value may fluctuate as per market movements. However, these must be viewed from a long-term investment perspective instead of measuring via short-term market fluctuations.

2. Are ELSS high risk?
   ELSS funds are diversified equity funds and have a similar risk as equity funds because of exposure to equities. However, ELSS funds come with a three year lock-in period post investment. During this period, the money invested in the fund cannot be redeemed. Thus, ELSS are less impacted by short-term market fluctuations.

3. Can ELSS be stopped?
   If an investor has invested in ELSS via the SIP mode, the same can be cancelled at any time. An investor can pause the SIP investment for a specific time. ELSS funds come with a lock-in period of 3 years. Therefore, the units of ELSS funds can be redeemed only after 3 years.

4. How to invest in ELSS?
   To invest in ELSS, you can download the Fisdom app on your smartphone. The app allows a seamless investment process by looking at various fund options, fund performance statistics, investment time horizon, and selecting a convenient mode of investment.

5. Which is better: ELSS or PPF?
   ELSS and PPF are both tax-saving long-term investments. In the long run, ELSS provides higher chances of generating significant returns as compared to PPF since ELSS invests in equities. PPF, on the other hand, provides a fixed rate of return.