If you are looking for a smart way to save tax and grow your wealth, you might want to consider investing in ELSS mutual funds. ELSS stands for Equity Linked Savings Scheme, which is a type of mutual fund which invests mainly in equity and equity-related instruments. ELSS funds offer a dual benefit of tax saving and wealth creation, making them an attractive option for investors. In today’s blog post, we will understand what ELSS funds are, how they work, what their benefits are, and how to invest in them.
What are ELSS funds?
ELSS funds are the form of mutual funds that invest at least 80% of their corpus in equity and equity-related instruments, such as shares, debentures, warrants, etc. ELSS funds are also called tax saving schemes, as they offer tax deductions of up to Rs. 1.5 lakh under Sec-80C of the Income Tax Act, 1961. This specifically means that if you invest up to Rs. 1.5 lakh in ELSS funds in a financial year, you can reduce your taxable income by that amount and save tax accordingly. For instance, if your taxable income is Rs. 10 lakh and you invest Rs. 1.5 lakh in ELSS funds, your taxable income will be reduced to Rs. 8.5 lakh and you will save tax of up to Rs. 46,800 (assuming you are in the 30% tax bracket).
ELSS funds have a lock-in period of three years, which means that you cannot withdraw your money before that. This is the shortest lock-in period among all the tax saving options available under Section 80C, such as PPF- Public Provident Fund, NSC- National Savings Certificate, Fixed Deposits (FD), etc. The lock-in period ensures that you stay invested for the long term and benefit from the power of compounding and the growth potential of equity markets.
How do ELSS funds work?
ELSS funds work like any other mutual fund, where you invest your money in a scheme that is managed by a professional fund manager. The fund manager selects the stocks and other securities that suit the investment objective and strategy of the scheme. The fund manager also monitors the performance of the portfolio and makes changes as per the market conditions and opportunities.
You can invest in ELSS funds either as a lump sum or through a Systematic Investment Plan (SIP). A lump sum investment means that you invest a large amount of money in one go, while an SIP means that you invest a fixed amount of money at regular intervals, such as monthly/quarterly. Both methods have their own pros and cons, depending on your financial goals, risk appetite, and market timing. Generally, an SIP is considered a better option for long-term investors, as it helps average out the purchase cost and reduces the overall effect of market fluctuations.
You can invest in ELSS funds online/offline, depending on your convenience and preference. Online investing is faster, easier, and cheaper, as you can invest through various platforms, such as websites, apps, or portals of mutual fund companies, brokers, or aggregators. Offline investing involves visiting the branch or office of the mutual fund company or the distributor and filling up the physical forms, and submitting the required documents.
You can choose from a variety of ELSS funds available in the market, depending on your risk profile, return expectations, and investment style. You can compare the performance, portfolio, expense ratio, ratings, and reviews of different ELSS funds and select the ones that suit your needs.
What are the Benefits of ELSS Funds?
ELSS funds offer several benefits to investors, such as:
• Tax saving: ELSS funds offer tax deductions of up to Rs. 1.5 lakh under Sec 80C, Income Tax Act, 1961. This helps you save tax and increase your disposable income. Moreover, the returns from ELSS funds are also taxed at a lower rate than other tax-saving options. The returns from ELSS funds are treated as long-term capital gains (LTCG), which are taxed at 10% if they exceed Rs. 1 lakh in a financial year. In contrast, the returns from other tax saving options, such as FDs, NSCs, etc., are treated as income from other sources, which are taxed at your slab rate, which can be as high as 30%.
• Wealth creation: ELSS funds invest mainly in equity and equity-related instruments, generating higher returns than other asset classes in the long run. Equity markets are known to deliver inflation-beating and wealth-creating returns over a long-term horizon, as they reflect the growth and development of the economy and the corporate sector. ELSS funds also benefit from the power of compounding, which means that the returns earned are reinvested to generate more returns, creating a snowball effect. ELSS funds can help you achieve your long-term financial goals, such as retirement, children’s education, marriage, etc.
• Diversification: ELSS funds invest in a diversified portfolio of stocks and other securities across different sectors, industries, themes, and market capitalisations. This helps in reducing the risk element and volatility of the portfolio, as the losses in one segment can be offset by the gains in another. Diversification also helps in capturing the growth opportunities in various segments of the market, as different sectors and companies may perform differently at different points in time. ELSS funds can help you diversify your overall investment portfolio and enhance your risk-adjusted returns.
• Professional management: ELSS funds are managed by qualified and experienced fund managers who have the expertise and knowledge of the equity markets and the economy. The fund managers conduct extensive research and analysis of the companies and sectors that they invest in and use various tools and techniques to select the best stocks and securities for the portfolio. The fund managers also monitor the performance of the portfolio and make changes as per the changing market conditions and opportunities. By investing in ELSS funds, you can benefit from the professional management of your money and save time and effort.
• Discipline: ELSS funds have a lock-in period of three years, which means that you cannot withdraw your money before that. This instils a sense of discipline and commitment in your investment, as you are forced to stay invested for the long term. This also helps in avoiding the temptation of exiting the market during volatile or bearish phases, which can hamper your returns. By investing in ELSS funds, you can develop a habit of long-term investing, which is essential for wealth creation.
How to invest in ELSS funds?
Investing in ELSS funds is simple and easy if you follow these steps:
Investing in ELSS funds is a straightforward process:
- Set your goals and risk tolerance.
- Choose the right ELSS funds.
- Decide on a lump sum or SIP.
- Complete KYC.
- Fill out the form and make the payment.
- Monitor and review your investment regularly.
Conclusion
In conclusion, ELSS funds offer an effective way to save on taxes while building wealth. They primarily invest in equities and related instruments, offering the potential for higher long-term returns compared to other asset classes. ELSS funds also provide tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961, and have a relatively short lock-in period of three years compared to other tax-saving options. Additionally, they bring diversification, professional management, and discipline to your investment portfolio. Investing in ELSS funds is a tax-smart and wealth-building choice.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.