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What is Mutual Fund?

March 15th, 2023

Investors look for investment opportunities that will help them generate wealth, get good returns, and save taxes. Unfortunately, today's market is overwhelming with many investment options, so that is where ELSS funds step in. We will explore more about ELSS mutual funds and talk about the aspects of investing in them.

WHAT ARE ELSS FUNDS?

ELSS is a type of equity mutual fund which qualifies for tax exemption under Section 80C of the Income Tax Act.

Equity Linked Savings Scheme (ELSS) is an acronym for "Equity Linked Savings Scheme." It functions similarly to any other open-ended equity fund that invests primarily in the stock market to produce growth for investors through capital appreciation (dividends).

These investments have the lowest lock-in period of three years. An investor can claim a deduction of up to Rs 1.5 lakh from their total gross income by investing in ELSS under section 80C of the Income Tax Act, 1961.

As a result, an ELSS competes for a piece of the tax-conscious investor's wallet with other products such as the PPF, NPS, a tax-saving fixed deposit, a national savings certificate, and so on. An ELSS, on the other hand, is a pure-play equities asset, unlike the other securities, which are mainly fixed-income products. As a result, ELSS is classified as a wealth growth vehicle rather than a savings vehicle.

As a result, the ELSS, like other equity funds, follows a tumultuous route to growth and offers returns with many ups and downs. However, it compensates for this volatility by possibly giving more enormous profits.

WHAT ARE THE FEATURES OF ELSS MUTUAL FUNDS?

  1. ELSS Funds invests minimum 65% of its portfolio in Equity shares & can go upto 100% in Equity shares.
  2. You get the best of both worlds: capital appreciation and tax savings from your stock investments.
  3. There are no entry or exit loads in ELSS Mutual Funds.
  4. If you want to earn a regular income, you may receive dividends or go with the growth option to gain capital appreciation.
  5. They have a three-year mandatory lock-in term, the shortest of all tax-saving mechanisms.

WHAT ARE THE TAX BENEFITS OFFERED BY ELSS FUNDS?

ELSS mutual fund scheme investments qualify for a tax deduction under section 80C. However, any redemption or switch out undertaken in the scheme after the lock-in period is subject to taxation. Long-term capital gains tax applies to equity mutual funds held for longer than one year, but if the profits reach Rs 1 lakh in a financial year, they are taxed at a rate of 10% without indexation advantage.

WHY SHOULD YOU INVEST IN ELSS MUTUAL FUNDS?

There are certain benefits of investing in ELSS mutual fund schemes.

SAVE TAX AND GENERATE WEALTH OVER TIME

To begin with, ELSS funds are mutual funds that invest in stocks. They are multi-cap funds, which invest in firms of all sizes - large, mid, and small - across all industries. And, as an equity mutual fund, it can generate wealth through equities over time.

To put it another way, investing in ELSS allows you to build wealth over time like any other equity mutual fund. In addition, investment in an ELSS provides tax benefits that no other mutual fund does.

SHORTER LOCK-IN PERIOD

ELSS earns an extra point for its lock-in duration compared to other tax-saving investing alternatives. For example, PPF has a 15-year lock-in time, ULIP has a 5-year lock-in period, tax-saving FDs have a 5-year lock-in period, and NSC has a 5-year or 10-year lock-in period. In comparison, the ELSS lock-in duration is only three years.

START BY INVESTING SMALL THROUGH SIPS

ELSS can be purchased using a systematic investment plan (SIP) like all other mutual funds. For as little as Rs 500, you can begin a SIP for an ELSS mutual fund. And like other mutual funds, you can raise your investment amount through SIP top-up as your income rises.

Most other tax-advantaged investment options don't allow you to invest money systematically every month.

WHAT ARE THE FACTORS TO CONSIDER BEFORE INVESTING IN ELSS FUNDS?

When deciding whether or not to invest in an ELSS mutual fund, keep the following points in mind:

INVESTMENT HORIZON

To invest in ELSS funds, you must have a longer-term investment horizon than five years. This is because ELSS funds' equity involvement necessitates a longer investment horizon to limit market volatility.

INVESTMENT RETURNS

You should be aware that ELSS funds do not guarantee returns because their success is contingent on the performance of the underlying stocks. Having a longer investment horizon than 5 years, on the other hand, can yield better returns than any different tax-saving investing strategy.

LOCK-IN PERIOD

The lock-in period for ELSS mutual funds is three years. This is because your investments are required to be locked in for three years from the date of acquisition, and you cannot redeem them until the whole time term is up.

CONCLUSION

ELSS funds are a two-in-one investment vehicle. It not only helps you save money on taxes, but it also helps you build significant wealth with that money. As a result, you may put these assets toward long-term goals like kid education and retirement, where you'll need to outperform inflation by a large margin

Disclaimer: All Mutual Funds are subject to market risk. Please read all scheme-related documents carefully.