Equity Linked Savings Scheme (ELSS) 

What is ELSS?

Equity Linked Savings Scheme (ELSS) is a Tax-Saving Equity Oriented Mutual Fund that invests a major portion of the corpus (funds) in equity shares of different companies.

Every fund house has a fund manager who picks the equity stocks from across the sectors after conducting in-depth research to maximize the returns on the capital.

Investment in ELSS provides a dual benefit of Investment  and Tax Saving u/s 80C (old tax regime). So, if one invests in ELSS, it allows you to claim tax exemption of up to Rs. 1,50,000 under Sec 80C of Income-tax ACT besides capital appreciation (over a long period).

The returns under ELSS can be attractive when compared to other fixed-income tax saving options, provided one decides to remain invested for a long time. However, the returns are not guaranteed, as it depends purely upon the stock market performance and the competence of the fund manager.

Key features of ELSS:

• • The minimum investment amount required is only Rs. 500. Even small investors can afford to invest in this tax-saver option and create a corpus over the years with regular investment.
  • Investment can be either in lumpsum or through SIP (Systematic Investment Plans). If one opts for SIP, the lock-in period for each SIP will start from the date of SIP. Hence the investments will have different maturity dates.
  • ELSS has a mandatory lock-in period of three years. Premature withdrawal is not allowed. However, the lock-in period is much lower when compared to other tax-related instruments which are eligible for deduction u/s 80C like, PPF, NPS, NSC, Tax savings bank deposits, etc.
  • After the lock-in period of three years, an investor can redeem the invested amount or even switch to another scheme.
  • If one decides to invest in ELSS, you can choose from:
    • Dividend Option
    • Growth Option
  • Investment in ELSS allows you to claim an exemption under sec 80 C of Income Tax (old tax regime), thus making it a tax-beneficial investment.
  • The income earned on redemption of ELSS will be classified as Long-Term Capital Gain as it has a lock-in period of three years. This gives the advantage of returns getting taxed at a lower rate of 10%( if the gain exceeds Rs. 1 lakh).
  • Returns under good ELSS scheme are higher (10% to 12%) when compared to other fixed tax saving options like FD and PPF. But the returns are not guaranteed; hence the risk is higher .However, if one remains invested for the long-term, the returns might be better.
  • The risk involved in ELSS is higher when compared to a Debt Fund or balanced fund as the NAV fluctuates with a change in the share market trend.
  • Entry and Exit load is not applicable in the case of ELSS.
  • Being KYC compliant is one of the primary requirements for investing in ELSS. Investment can be done, either by submitting the physical form at the mutual fund house registered office/ branch office or online through the fund house website.

Few pointers to consider before choosing the fund house:

• • Compare the fund with its competitors and the performance of the benchmark Index to know how the fund is performing.
  • Compare the expense ratio of the fund house. A high expense ratio will eat up your returns over the years and reduce earnings.
  • The experience and competence of the fund manager are important criteria as your returns are dependent on his/her decisions. The fund manager should be knowledgeable and should have significant understanding and experience to make the right call to maximize your returnS.
  • While investing in ELSS, always choose the Direct option. Avoid going for the Regular option. This is because when you opt for a regular scheme, the mutual fund company pays a commission to the intermediary. This cost is recovered as an expense from the plan. This results in an increase in the expense ratio, thus compromising your returns.
  • Check the allocation policy of funds to understand
    • The sectors which are chosen for investment by the fund manager.
    • Major companies chosen by the Mutual Fund house.
    • Distribution of funds into Large cap, Mid cap, and Small cap companies.

Conclusion:

ELSS offers an excellent combination of Equity Investment and Tax Saving. Investment in ELSS is suitable for people looking for wealth-creation opportunities over the long term.

Investors in the higher tax bracket can invest in the ELSS scheme to accumulate wealth for children’s education, plan their retirement, and other long-term goals.

It is also a good option for investors who face difficulty in tracking the stock market. A SIP in one of the ELSS can take care of your tax savings and give you an advantage of capital appreciation in the long run. However, before investing in ELSS or other financial instruments one should be clear about their financial goals, risks, and needs.

Many investors look at the ELSS scheme as purely tax-saver funds. Hence, they invest in these schemes at the end of the year to avail tax benefits. But, this is not the best way of investing. If the market is at its peak at the year-end, it can affect your earnings drastically and you will end up compromising on the returns. To maximize the returns, one needs to plan and invest at the right time. 

Another factor to consider before investing in ELSS is to have the long term vision of holding the investment in these schemes for about 5-8 years to reap good benefits. Since equity investments are directly linked to stock market performance, there is always a possibility of losses in the short run.