Mutual Fund Investors in India take note – You can now save money on taxes with ELSS Funds

Mutual funds in India are one of the best investment options available in the current market scenario. These funds work under an Asset Management Company that pool money from several investors and further invest the corpus in company stocks and bonds. Mutual funds in India are classified as Equity Funds, Debt Funds, and Hybrid or Balanced Mutual Funds. The equity-linked saving scheme in India is a tax-saving instrument that invests largely in equities and a small part in debt funds.

Those investors investing in Mutual funds in India need to know that the Equity-linked saving scheme in India (ELSS), stands a level higher than other instruments enjoying tax exemption under section 80C of the Income Tax Act. The main three reasons are – higher returns, shorter lock-in period, and tax exemption. Moreover, to invest in Equity linked saving scheme in India, you don’t need to learn about the market conditions, investing in high-return securities, or worry about your investments. All your works are carried out professionally by fund managers. Again, you don’t need to worry about investing a large sum of money at a time if you are earning low. You get the flexibility of investing through a Systematic Investment Plan or SIP. It is a monthly investment plan, where you pay a fixed amount of money every month. You can start investing with a minimum of Rs 500. Within the lock-in period, you cannot redeem your investment. As the investments are mostly on AssetClass, therefore, capital appreciates in the long run. One can invest the redeemed amount after completion of the 03 years lock-in period. Further, it is suggested to keep investing for longer periods.

The equity-linked saving scheme in India (ELSS) is divided into two broad categories – Growth Fund and Dividend Payout. Growth Fund is for the long-term investors where the fund grows significantly during the invested years. Dividend Payout can be further subdivided into Dividend Payout and Dividend Re-investment. For Dividend Payout, you get tax-free dividends whereas, in Dividend Re-investment, the amount accumulated is invested further into fresh ELSS.

Benefits of investing in ELSS funds

There are several benefits of the Equity-linked saving scheme in India that all mutual fund investors must know. It is a fund where tax saving and higher return together make you save money. Here are some of the benefits of ELSS funds.

• Tax deductions – Under Section 80C, if your investment per annum is Rs 1.5 lakh and you fall within the 30% Income Tax Bracket, then you can save taxes up to Rs 46,800 per annum. If your returns in the long term are above Rs 1 lakh then you are subjected to a tax of 10% Long-Term Capital Gains from ELSS. But the dividends received by the investors in hand are tax-free. The ELSS tax benefit is attractive for investors who are interested in investing and saving tax together.
• Shortest lock-in period – ELSS funds have a comparatively shortest lock-in period concerning other tax saving instruments under section 80C. The lock-in period for an ELSS scheme is three years. With these funds, you get greater flexibility. You can continue holding units even after the completion of the lock-in period. In comparison to this, PPF has a 15 years lock-in period, NSC, Bank FD, ULIP has a 5 years lock-in period.
• Potentially higher returns – In comparison to most of the tax-saving schemes under section 80C, ELSS funds tend to offer higher returns as they invest largely in equity instruments. These returns are market-linked and therefore you have a greater chance of capital growth in the long term investment plan. Whereas other tax saving instruments like PPF, NSC, and Bank FD is having a fixed return rate.
• Easy investment options – Investing in an Equity Linked Savings Scheme in India can be conducted through a Systematic Investment Plan (SIP) or as a lump sum investment at a time. For beginners and low salaried personals, SIP is the best investment option as you can invest a little every month for a period. SIP starts from as low as Rs 500.
• Low investment option – You can start investing in ELSS funds with Rs 500 and multiply the amount thereafter as per your capacity. Fund managers will help you to get a clear picture of how to invest.
• Zero exit load – You don’t need to pay an extra charge or any other fees while you redeem your Equity linked saving scheme in India (ELSS) investment corpus after completion of three years lock-in period.

Factors to consider before investing in ELSS

While you are opting for investing in Equity linked saving scheme in India, you must consider certain factors.

• Investment goal – Consider a long term investment goal. It is suggested to select a 5-7 years investment horizon. Since the class of investment is dependent on equity funds, therefore to mitigate market volatility, having a long term investment goal is necessary.
• Return expectancy – Since the fund invests in equity class, the return can be expected to be high. But again, remember, for higher returns it needs to be invested for the long term. Further, you must remember as the risks here are moderate so are the returns in comparison to other Mutual funds in India.
• Lock-in period – The ELSS scheme has a mandatory lock-in period of 3 years. Within this period, you cannot redeem your investments. Once the lock-in period gets over you get the flexibility of either taking out all your investments or reinvest as a new investment plan.

Nothing comes to us without risks. Every step of our life is full of uncertainties. So why not try investing in Mutual funds in India by taking some risks, when you get an assurance of capital appreciation? If you are in your 20’s, then this is the perfect time for you to invest. ELSS is a great option to start with. You don’t need great knowledge about the stock market, investments, and so on to invest in Mutual funds in India. You get expert support from the fund manager and all your investments are handled under professional care. Start investing with Rs 500 and keep growing with time. But remember to make an investment goal according to your income level, never burden your shoulders with loads of investment and then diversify the portfolio for earning high.

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March 23, 2021