An ELSS (Equity Linked Savings Scheme) is a tax-saving mutual fund that invests in equity and equity-related instruments. It has a lock-in period of three years, during which the investor cannot redeem the units. Investing in an ELSS can help you save tax under Section 80C of the Income Tax Act, 1961, up to ₹1.5 lakhs per financial year.
With more and more tax saving options available in the market, it can be challenging to decide which one is best suited for your tax savings needs. In this guide, we will discuss how you can invest in ELSS mutual funds and the benefits associated with them.
Benefits of Investing in ELSS
The primary benefit of investing in an ELSS is tax savings. You can save up to ₹1.5 lakhs per financial year under Section 80C by investing in an ELSS. Additionally, you will also enjoy higher returns compared to other tax-saving instruments, such as bank FDs or PPFs, due to their equity investments. The lock-in period of 3 years provides enough time for your investments to grow significantly.
Risks of Investing in ELSS:
Investing in equity-based tax-saving instruments entails some risks as well. As the funds invest in equity and equity-related instruments, they are subject to market fluctuations, which may result in a loss of your principal investment amount. Additionally, you will also incur an exit load if you redeem the units before the lock-in period ends. You should assess these risks against the tax savings benefits on offer before investing your hard-earned money into ELSS funds.
How to Invest in ELSS?
You can invest in ELSS mutual funds using the following methods:
You can purchase or redeem ELSS mutual fund units directly through online investment platforms. All you need to do is to register an account and transfer the required amount from your bank account. Investing your money can be accomplished with a lump sum or as a Systematic Investment Plan (SIP). The SIP route ensures consistency and discipline, thus lowering the risk to capital. You could even invest an incredibly small amount of 500 INR in an Equity Linked Savings Scheme fund!
Mutual Fund Houses:
You can also invest in ELSS mutual funds by visiting a mutual fund house like Edelweiss Mutual Fund or its authorized agent. Generally, you will be asked to fill up an application form providing details about yourself and the amount that you wish to invest.
How to Choose the Right Equity Linked Savings Scheme?
When selecting an ELSS fund, you should consider the following factors:
The Objective of Investment:
You should define your investment objective. Are you looking for tax savings or long-term wealth creation? This will help you identify the right kind of funds to invest in.
As with any other mutual fund, it is important to evaluate the past performance of an ELSS scheme before investing. Look at both short-term and long-term returns generated by the fund over different periods.
Expense Ratio & Turnover Ratio:
The expense ratio indicates the fund management charges associated with running the scheme, while the turnover ratio measures how frequently investments are bought and sold in a particular period. Higher ratios represent higher costs, which can eat into your returns.
Returns Of ELSS Funds
As mentioned above, ELSS funds investments tend to generate higher returns than other tax-saving instruments due to their exposure to the stock market. However, these returns are subject to market fluctuations and cannot be guaranteed. Over the long term, ELSS funds have been known to generate superior returns compared to other tax-saving options.
With that being said, in order to estimate the value of your ELSS investment over a specific time period, it is vital that you use an ELSS calculator offered by various online platforms. This calculator will help you calculate the tax savings potential of your investment and also estimate the returns generated over a specific time period.
So, if you are looking for tax-saving options that can potentially generate higher returns than, then investing in ELSS mutual funds could be a good option. Just make sure to consider the various factors described above before investing and use an ELSS calculator to estimate your tax savings potential and returns.