What is an ELSS mutual fund?

Equity Linked Savings Schemes (ELSS) are one of the most popular tax-saving instruments in India. These mutual funds invest primarily in the stock market and offer tax deductions under Section 80C of the Income Tax Act. In this blog, we will dive deep into what ELSS mutual funds are, their benefits, how they work, and why they are considered a great investment option for long-term wealth creation along with tax savings.

What is an ELSS Mutual Fund?

An Equity Linked Savings Scheme (ELSS) is a type of mutual fund that invests predominantly in equities (stocks). It is primarily a tax-saving instrument that comes under Section 80C of the Income Tax Act of India, allowing you to claim deductions of up to ₹1.5 lakh per financial year on your taxable income. ELSS funds have a lock-in period of 3 years, which is the shortest among tax-saving investment options.

How Does an ELSS Work?

ELSS mutual funds pool money from multiple investors and invest it in a diversified portfolio of stocks. These funds are actively managed by professional fund managers who analyze market trends and select stocks with growth potential. Since the primary objective is long-term capital appreciation, ELSS funds are suited for investors with a higher risk appetite, as equities can be volatile in the short term.

Tax Benefits of ELSS Funds

The main appeal of ELSS funds is their tax-saving benefit. By investing in ELSS, you can claim deductions of up to ₹1.5 lakh in a financial year under Section 80C. The returns earned through ELSS investments are subject to long-term capital gains (LTCG) tax. However, if the gains exceed ₹1 lakh in a financial year, they are taxed at 10% without the benefit of indexation.

Benefits of ELSS Mutual Funds

• Tax Savings: The biggest advantage of investing in ELSS is the tax deduction of up to ₹1.5 lakh under Section 80C.
• Potential for High Returns: Since ELSS funds invest in equities, they have the potential to generate higher returns over the long term compared to other tax-saving instruments like PPF or NSC.
• Short Lock-in Period: ELSS has the shortest lock-in period of just 3 years, making it more liquid compared to other tax-saving instruments that have a lock-in period of 5-15 years.
• Diversification: ELSS mutual funds provide exposure to a diversified portfolio of stocks across various sectors and industries, reducing risk.
• Systematic Investment Plan (SIP) Option: ELSS funds can be invested through SIPs, making it easier to invest small amounts regularly and benefit from rupee cost averaging.

How to Invest in ELSS Mutual Funds?

You can invest in ELSS mutual funds either through a lump sum investment or a Systematic Investment Plan (SIP). Here’s how to invest:

• Step 1: Choose an online platform like Angel One, Zerodha, Groww, or any other mutual fund distributor.
• Step 2: Complete your KYC (Know Your Customer) process, which is mandatory for all investors.
• Step 3: Select the ELSS fund that suits your investment goals and risk profile.
• Step 4: Make the investment via lump sum or SIP. SIPs are particularly useful for those who want to invest small amounts regularly over time.
• Step 5: Track the performance of your ELSS fund regularly to ensure it meets your financial goals.

Things to Consider Before Investing in ELSS

Before investing in ELSS funds, consider the following factors:

• Risk Appetite: Since ELSS funds invest in stocks, they are subject to market volatility. It’s important to assess your risk tolerance before investing.
• Investment Horizon: ELSS funds are ideal for long-term investments. If you have a time horizon of 5 years or more, ELSS can help you grow your wealth.
• Fund Manager’s Expertise: The performance of an ELSS fund largely depends on the expertise of the fund manager. Be sure to check the track record of the fund manager before investing.

Conclusion

ELSS mutual funds are a great investment choice for those looking to save taxes while also aiming for long-term wealth creation. With a relatively short lock-in period and the potential for higher returns, they offer a good balance of risk and reward. However, it’s essential to choose the right fund and align it with your financial goals and risk profile. Start investing today and take advantage of the tax-saving benefits!