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ELSS Mutual Funds 101: Here's all You Need to Know

ELSS Mutual Funds 101: Here's all You Need to Know

Frank Malone1003 29-Jan-2020

Investments in a mutual fund can be made through several schemes. The equity-linked saving scheme falls under the category of mutual funds and predominantly invests in the equity market. This is a distinctive mutual fund scheme where the larger chunks of capitals are invested in equity and associated funds. It offers a privilege of tax savings to the investors under Section 80C of the Income Tax Act, 1961. Investors get a choice to invest through routes like Systematic Investment Plan (SIP) or Lumpsum investment. This scheme is meant to strike a balance between volatility and returns. The ELSS has a minimum lock-in period of 3 years, but to avoid the volatility, one must try to remain invested for about 5-7 years to receive lucrative returns. You have to go through the entire article to have a clear idea of ELSS meaning and other details associated with it.

Key attributes of ELSS Schemes:

● ELSS is mostly preferred as a long-term investment market tool. The volatility that is subjected to the short-term get phased out if investors stay invested for a long-term. Since it is equipped with a fixed lock-in period, there is no point panicking even if the market goes through a rough phase. This eventually reduces the redemption burden of the fund managers, which allows them to make a prudent investment in the equity market and reap all the benefits for their investors.

● The primary objective of this ELSS scheme is capital appreciation, along with tax benefits for the investors. The risk potentiality is high with generous returns as compared to conventional plans like NSC, PPF, etc., which also has a longer lock-in period.

● When it comes to investment in ELSS, there is no upper cap which means you can invest as much amount as you want. Although tax benefit has a threshold at INR 1.5 lakhs in a financial year under the section 80C of Income Tax Act. Any investment beyond this given limit will not generate any returns.

● Investments in ELSS can also be made through the route of SIP. This makes investment more convenient, as majority investors do not prefer to invest all the resources at a one go when they have a choice to make a small contribution towards investment to build a large corpus over a period.

● ELSS mutual funds come under long term investment, but the lock-in period is really the shortest among all other the tax-saving scheme. Investors have a lock-in period of 3 years, which means that after maturity, they can withdraw the entire amount. Still, they can also prefer to remain invested in the market after the completion of the lock-in period. The extended tenure doesn't refer to an added lock-in period of three years. There is a freedom to redeem the amount at any point after the 3 year lock-in period.

● Earlier the mutual funds used to have an entry charge, which was later abolished by the SEBI. Also, the ELSS is devoid of any exit load or redemption charge. The total expense ratio (TER) deputes the scheme management charge, which is lower in direct plans when compared to regular plans.

● ELSS offers an excellent scheme for tax-saving. It produces sizeable capital gains as compared to other traditional tax saving schemes. Risk-tolerant investors can consider investing for a longer tenure in ELSS, as it generates better inflation-proof returns in comparison to other assets.

Some significant advantages of investing in an ELSS:

Provides Tax Benefits: An amount up to INR 1,50,000 can be invested in an equity-linked savings scheme that is eligible for tax benefit under section 80C of the Income Tax Act 1961. Moreover, the schemes also give an appreciation of capital to its investors.

Only 3 year lock-in period: ELSS has a short term lock-in period of 3 years when compared to conventional saving schemes like national saving certificate (NSC) and Public Provident Fund (PPF) that comes with a lock-in period of 6 years and 15 years respectively. It is preferable for investors looking to invest in the short-term. The lock-in period of ELSS is also less than most of the other mutual fund options.

There are options for Growth and Dividends: There are two routes of investment in ELSS through a growth fund and dividend fund. A lump sum amount has to be paid by the investors in a growth fund option. On the contrary, a fixed amount has to be paid by the investors in monthly instalments in a dividend option.

Potential of Higher Returns: If existing market conditions perform well, then there is a potential to earn high returns on investment as the majority of the amount invested in ELSS are equity-oriented. A right combination of the portfolio will help the investors to reap maximum returns when the economic conditions are favourable.

Low Minimum Amount: ELSS is a good scheme for low-income individuals as well. The minimum money that can be invested in an ELSS scheme is INR 500.

These are all the facts about ELSS meaning equity-linked saving schemes that investors must be aware of before making any investment on the same.

Updated 29-Jan-2020
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