Equity Linked Savings Schemes (ELSS) are a type of mutual fund that primarily focuses on investments in equity and equity-related securities. They are an attractive investment as they provide dual benefits — tax-saving and the potential for high returns from equity investments. With this, ELSS mutual funds have gained popularity in recent years.
In this blog, we will discuss five things that you should know before investing in Equity Linked Savings Schemes funds.
5 Things to Keep in Mind Before You Invest in ELSS Mutual Funds
Here are the top 5 things you must consider when investing in ELSS funds.
1. Tax Benefits
ELSS mutual funds are known for the tax saving benefit they provide under Section 80C of the Income Tax Act. With ELSS, you can save up to ₹1.5 lakh per financial year on your taxable income.
This can actually help in decreasing the taxable income by a considerable extent, which is why many tax-savvy investors like to go with ELSS. But remember to account for your other tax-saving investments.
2. Lock-in Period
ELSS mutual funds have a lock-in period of three years. You cannot redeem your investment during this period.
This helps enforce a long-term investment discipline. However, ELSS mutual funds have a shorter lock-in compared to other options like the Public Provident Fund (PPF) which has a lock-in for 15 years, or National Savings Certificate (NSC) for 5 years.
3. Market Risks
ELSS fund returns are market-linked and can go through phases of volatility. So, it is important that you understand your risk tolerance levels before you invest in mutual funds online.
ELSS mutual fund returns are not fixed like guaranteed returns on fixed-income instruments. They have historically offered competitive returns over the long run as compared to other fixed-income instruments, but are not risk-free.
4. Potential for Competitive Returns
ELSS mutual funds have a scope of fetching competitive returns compared to traditional tax-saving instruments due to their equity exposure. The fund managers typically invest at least 80 percent in equity and equity-related instruments as the underlying assets, which can include large-cap, mid-cap, and small-cap stocks.
This diversified approach can result in substantial capital appreciation over the long term, particularly when the market is doing well. Still, short-term market volatility can still be there, requiring patience and a long-term view.
5. Systematic Investment Plan (SIP) Option
Investing in ELSS through a Systematic Investment Plan (SIP) can be an effective strategy. Systematic Investment Plans (SIPs) in mutual funds allow you to invest a fixed sum of money in a mutual fund periodically, every month. A SIP can be started with an amount as low as ₹500.
SIP helps you to average out the cost of units purchased and hence reduces the impact of market volatility. This phased investment approach can be beneficial in managing risks and maintaining investment discipline.
Conclusion
ELSS mutual funds can provide you with competitive returns provided it is done with proper knowledge and planning. Tax benefits, shorter lock-in periods, the possibility of better returns, market risk, and the option to invest via SIPs are the key things to consider.
It is important that you align your investments with your financial goals and risk appetite to make the most out of ELSS mutual funds. Conduct thorough research or consult a financial advisor to tailor your investment strategy effectively. To invest in mutual funds, open an account with Dhan.
