What is the full form of ELSS
ELSS: Equity-linked Saving Scheme
ELSS stands for Equity-linked Savings Scheme. It is a Mutual fund investment scheme or a type of mutual fund that help you save income tax and provide an opportunity to grow money. So, it is also known as tax-saving funds. It mainly invests in equities (shares) of the companies listed in the stock exchanges to generate market-linked returns.
According to the Income Tax Act, under section 80c, taxpayers who invest up to INR 1.5 lakh in particular securities can claim it as a deduction from their taxable income. ELSS is one such security, and other securities include PPF, postal savings like NSC, tax-saving FDs, NPS, etc.
Features of ELSS Mutual Funds:
Some of the major features of the ELSS fund are as follows:
What tax advantages are provided by ELSS funds?
In accordance with the rules of Section 80C of the Income Tax Act of 1961, ELSS mutual funds offer tax deductions of up to Rs 1,50,000 each year. You can save paying up to Rs 46,800 in taxes as a result. However, keep in mind that your investments are locked in for three years starting from the investment date.
What aspects need to be taken into account before investing in ELSS?
While deciding whether to invest in an ELSS mutual fund, the following aspects must be taken into account:
Investment horizon: In order to think about investing in ELSS funds, you must have a horizon of at least five years. You must have a longer investment horizon due to the equity exposure of ELSS funds in order to lessen market volatility.
Returns: You need to recognise that ELSS funds do not give guaranteed returns since they depend solely on the performance of the underlying stocks. Yet, compared to other tax-saving investing options, having an investment horizon longer than five years can offer better returns.
Lock-in term: Three years is the lock-in time for ELSS mutual funds. Your assets are required to be locked in for three years starting on the investment date, during which time you cannot redeem your holdings.
Which mode should be used: SIP or Lumpsum?
If you are not ready to take on more risk, it is best to invest through a SIP. You have the option to invest in a fund through all business cycles when you use a SIP. This makes it easier for you to gain from buying fund units during market cycles. You buy more units when the markets are down and fewer units when the markets are up. As a result, your price for purchasing fund units averages out over time and ends up being on the lower end. As markets increase, you will profit from this since you will be able to realise bigger capital gains upon redemption. If you invest in a lump sum, this advantage is not accessible to you.
It's not a good idea to invest a lump sum unless the markets are in a negative trend, you're ready to take on more risk, and you have a longer investing horizon. You lose out on the chance to buy fund units during different business cycles, which necessitates holding your investment for longer than 5-7 years in order to see excellent returns.
When investing in an ELSS plan, investors must take into account a few aspects, including:
1) Intrinsic Risk
ELSS plans to invest money in the equities stock market. Hence, ELSS is subject to all of the risks related to equity investing.
2) No early withdrawal
Before the three-year lock-in period, you are not permitted to withdraw your money. Premature withdrawal is permitted for some other assets, such as PPF and bank accounts.
3) Scheme Selection
There are several ELSS programmes offered in the market. Before making an investment choice, you should thoroughly research the ELSS fund and its past performance. This check is quite similar to the check made before investing in another general mutual fund and includes the following: -
A comparison of the scheme's performance against its benchmark index, category, and peers. An excellent fund to invest in does not necessarily have good performance over one or two years. Choose a plan that has a very strong track record of long-term performance, at least for a period of 7 to 10 years.
The entire market value of the assets that are being managed by funds is known as the asset under management. Investors want to seek funds with a high AUM because they often have lower fee ratios. Low AUM in any plan is seen as dangerous because it's unknown how much each participant has invested. The performance of a low AUM plan may be impacted if a large investor withdraws, and the remaining investors in the scheme will be responsible for this effect.
Investors should seek a wide variety of investments. Your investment might suffer if the fund is not diversified and is just focused on one industry when there is little growth or saturation in that industry.
Low expense ratio - The proportion of total assets used to administer a mutual fund that is referred to as the expense ratio. The expense ratio outlines the fees you'll incur for handling your finances. As this fee is incurred annually, a high expenditure ratio might significantly reduce return via the force of compounding.