What are ELSS Funds?

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Here is everything there is to know about ELSS Funds - the concept, features, benefits and more.

Key Takeaways

• ELSS Funds offer both wealth creation and tax-saving features.
• You may claim a tax rebate of INR 1.5 Lakhs when investing in ELSS Funds.
• ELSS Funds have a mandatory three years lock-in period.
• ELSS Funds offers adequate equity exposure for better gains.
• The performance of ELSS Funds are primarily influenced by market volatility.

Mutual Funds have always been a great investment option as they provide inflation-adjusted returns. In recent times, Mutual Funds have become highly dynamic and has widened the scope for financial gains. ELSS Mutual Funds are a tax-saving scheme that is roping in several investors. So, what are ELSS Funds? Find out all about its features, benefits and more in this article.

What are ELSS Funds?

Short for Equity Linked Savings Scheme, ELSS are the only type of mutual fund investment scheme that offers investment and tax-saving features. ELLS funds mainly invest in equity and equity-linked securities such as listed shares. It is the only mutual fund that is eligible for a tax rebate. You can claim up to Rs. 1.5 Lakhs of tax rebate every year by investing in ELSS Mutual Funds as per the provision of Section 80C of the Indian Income Tax Act,1961.

There is no upper limit to the amount of money you can invest in ELSS Funds. You can even invest an amount as small as INR 500 in the beginning. The performance of ELSS Funds are influenced mainly by market volatility and hence, does not offer any guaranteed profits. As such, you must consider its past performance and conduct extensive research before investing.

What are the features of ELSS Funds?

Now that we have a clear understanding of ELSS Funds meaning, let us take a look at its features that makes it stand out from other investment options:

• Lock-in period

  There is no maximum tenure for investment. However, there is a mandatory three-year lock-in period that you must consider. You cannot withdraw your investment during these three years.

• Diversified investment

  A minimum of 80% of your total amount is invested in equity and equity-oriented share after careful consideration, whereas the remaining 20% is invested in debt and hybrid funds. This diversification helps mitigate the risks associated with equity investments.

• Professional management

  ELSS investments are undertaken by professional fund managers with years of fund management experience like all mutual funds. Such managers have adequate knowledge about the past performance of the funds, thus ensuring that your investment is in safe hands.

• Investment options

  You can invest in ELSS funds in two ways - as a lump sum investment or via the Systematic Investment Plan or SIP method. The latter is ideal for people who wish to invest as low as INR 100-500 (depending on the fund house).

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What Are The Advantages Of Investing In ELSS Funds?

Here are some advantages of ELSS Funds that make it a must-have in your investment portfolio:

• Dual Benefit

  ELSS Funds are the only investment option that offers the dual benefit of wealth creation and tax planning. It also provides better equity exposure allowing you to gain excellent returns over time.

• Tax Benefit

  Most investors opt for ELSS Funds for its tax planning advantage. As per Section 80C of the Indian Income Tax Act, 1961, you can claim a tax rebate of INR 1.5 Lakh of your ELSS Fund investment. The gains from ELSS funds up to INR 1 lakh is not taxable by law. However, any earnings above the set limit of INR 1 Lakh is taxable at 10%.

• Lower lock-in period

  ELSS Mutual Funds have the shortest lock-in period, unlike the National Pension Scheme(NPS), the Provident Pension Fund (PPF Scheme), and tax-saving Fixed Deposits. The lock-in periods for tax-saving FDs and PPF range from 5 years to 15 years, whereas for NPS, you have to stay invested until retirement.

• Tax Savings of up to INR 46,800

  ELSS investors belonging to the 30% income tax bracket can save up to INR 46,800 in tax payments on annual investments. This is a significant saving that makes ELSS funds an attractive investment option.

Factors To Consider Before Investing In ELSS Funds

Keep the following factors in mind before you invest in ELSS funds.

• Equity exposure

  ELSS Funds offers adequate equity exposure. This, in turn, helps you earn better gains. It also prevents you from making impulsive selling decisions.

• Lock-in period

  ELSS Funds have a mandatory three years lock-in period. You cannot exit the investment prematurely. The minimum lock-in rule also applies to ELSS SIP investments, which means that each instalment should be considered a separate investment, to be locked in for three years.

• Risk factor

  Unlike other conventional investment options, ELSS Mutual Funds do not offer guaranteed returns and are entirely subjected to market fluctuations. You should only consider ELSS investments if you have a mid to high-risk appetite.

Conclusion

Now that you know what are ELSS mutual funds, you can make more informed decisions when investing in them. Remember that ELSS Funds are sensitive to market fluctuations, and you cannot exit them prematurely. So make sure you do your research before you invest.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.