Equity Linked Savings Schemes, or ELSS as they are more frequently known, are excellent investment options that save on taxes. But if you’re thinking about investing in ELSS funds, you should be well informed.
The ELSS, a tax-saving mutual fund program, enables you to invest in equity and equity-linked securities and claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act (ITA).
A good portion of your assets is invested in equities and equity-related securities via diversified equity mutual funds called ELSS. The fund manager seeks out investments from businesses with a solid growth outlook and robust business models.
You can easily take advantage of tax benefits with ELSS funds while also attempting to increase returns by taking advantage of the potential of the equity markets.
Here are five things you should know regarding ELSS funds before investing in one:
The Income Tax Act of 1961’s Section 80C allows for various investment and payment choices, including ELSS. A deposit in the Public Provident Fund (PPF), a contribution to the Employee Provident Fund (EPF), an investment in a five-year bank fixed deposit, a life insurance premium, the principal repayment of a home loan for a residential property, the payment of a child’s tuition, etc. is some of the other tax-saving investment and payment options under Section 80C. The benefit under Section 80C is limited to Rs. 1.50 lakh for all qualified investments combined per fiscal year.
Even while the ELSS’s shorter three-year lock-in time is frequently cited as a plus compared to other tax-saving products’ lengthier lock-in periods, investors should ideally consider a longer holding period to reap the benefits of equity investment appreciation.
Three years may not always be enough time for the markets, particularly the mid and small-cap segments, to buck a negative trend and provide returns. For instance, the schemes’ three-year returns have been negatively impacted by the sharp decline that the mid and small-cap segments have seen during the past year.
After the lock-in period, some Section 80C investment options are automatically redeemed or liquidated without the investor having to take further action. The situation with ELSS is different, and investors must submit a separate redemption request to sell their ELSS holdings. In a way, this is also advantageous for the investors because it allows them to keep investing to pursue their long-term financial objectives.
Units for a long-term run
Although ELSS has a minimum lock-in term of 3 years, you might stay invested for a longer period if the fund is performing better than expected rather than taking a withdrawal. Mutual funds have historically performed better when kept over a longer period. Investors could be aware that investments in mutual funds are prone to market turmoil, and historical returns could or could not support the fund’s current performance for the foreseeable future.
Get exposure to equity markets
It’s likely that you want to invest in stocks but are unsure of where to begin. Try ELSS funds as a starting point. ELSS funds are a better option to gain stock exposure than simply investing in stock markets.
You benefit from a well-diversified portfolio and expert fund management for a little initial commitment. You can start a SIP with just Rs. 500 and avoid the stress of market timing.
One thing you should be aware of is that ELSS has a three-year lock-in period. If you can set aside some of your extra cash for that time, investing in ELSS funds is a great method to take advantage of the potential of equities companies.
Making a thorough plan at the start of the fiscal year is the best way to handle ELSS funds. Avoid delaying tax-saving investments till the end of the year. Your ability to choose the ideal ELSS fund for your needs will be aided by a goal-oriented and well-planned strategy.