Equity-linked Savings Schemes (ELSS) are also popularly known as tax-saving mutual funds in India. Under section 80C of the Income Tax Act, they afford both avenues to create wealth and save taxes. These funds have a lock-in period of three years, while all the other tax-saving investment tools available in the country have a lock-in period of a minimum of five years. Among long-term investors, ELSS mutual funds are a popular choice because they tend to offer high returns. In this blog, we will explore what ELSS mutual funds are, how they work, who should invest in them, and a lot more.
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How Do ELSS Mutual Funds Work?
ELSS mutual fund is an equity-linked mutual fund. It consists mainly of the equity of the companies listed, and then the equities are identified across the market capitalisation and sectors. These funds operate to achieve capital gains in the long run. ELSS funds generally have a lock-in for three years, which implies that the funds cannot be withdrawn or redeemed before the stipulated period. Only after 3 years, the gains can be redeemed, or the capital may be left invested to continue profiting in the growth of the market.
Who Should Invest in ELSS Mutual Funds?
The following individuals can invest in ELSS mutual funds.
- Salaried Individuals: Salaried individuals contribute towards the Employees’ Provident Fund (EPF), which is a fixed-income product. If an individual wants high returns, then ELSS funds can be a suitable investment option. While unit-linked insurance plans (ULIPs) and the National Pension System (NPS) also do the same, they have a higher lock-in period and lesser potential for returns. For instance, ULIPs have a lock-in period of five years.
- First-time investors: ELSS tends to be a good investment for young investors because it comes with certain tax benefits. They have less risk than directly invested stocks. SIPs can be a suitable method to invest in these funds.
- Taxpayers: As a young taxpayer you can therefore invest in these funds. They save tax under section 80C of the Income Tax Act.
- Long-Term Investors: Since ELSS funds have a lock-in period of 3 years, it has been suitable for long-term investors. But it also focuses on the lock-in period of SIP payments. Therefore, in the next 12 months, if an individual tries to fully redeem his investments, then he cannot do so until the last instalment of the SIP is made.
Things to Consider Before Investing in ELSS Funds
Along with learning what is an ELSS mutual fund, it is essential to keep some factors in mind while investing in them. The following are the things that need to be considered before investing in ELSS funds.
- Fund Performance: Before you start investing in a fund, you should research and compare its performance with that of other competitors.
- Expense Ratio: The expense ratio shows how much you invest in managing the funds. Select the funds which have lower expense ratios for higher net returns.
- Financial Reports: You can check the financial reports of the ELSS funds to examine their historical performance and asset allocation. This will help you in making more informed decisions.
- SIP or Lumpsum: The two main types of methods through which you can invest are either SIP or lumpsum. Under the SIP method, you can invest a regular amount monthly. However, using the lump sum method, you invest a huge sum of funds at once.
- Fund Manager: The fund manager will assume an important function in managing your funds. Thus, they should be efficient and have enough experience to pick the right stocks and create a suitable portfolio.
How to Invest in ELSS Funds
There are several ways to invest in ELSS funds:
- Online Mutual Fund Investment Platforms: Investors may invest in ELSS funds through various online platforms designed for mutual fund investments. Many of these platforms now offer a dedicated ELSS app that simplifies tracking, comparing, and investing in tax-saving mutual funds.
- Demat Account: Existing Demat account holders may also invest in ELSS funds, which is a common method for stock and mutual fund investments.
- Registrars: ELSS funds can be accessed through registrars, where investors may directly purchase units of the funds.
- Through an Agent: Investors may choose to invest via an agent who might help guide the investment process and assist with fund selection.
Each method may offer different levels of convenience and service depending on individual preferences.
Conclusion
ELSS mutual funds present a suitable blend of tax-saving benefits and wealth-creation opportunities. It is a preferred choice for both new and seasoned investors. ELSS funds offer both flexibility and growth. They have a shorter lock-in period compared to other tax-saving instruments. Additionally, they provide the potential for higher returns through equity investments. Whether you’re saving on taxes, starting mutual funds, or planning long-term, ELSS can be a smart choice. You can also use tools like an ELSS app or choose between SIP and lumpsum modes to invest. These tools can help you make informed decisions and simplify the investment process.
