Are you new to equity funds? Are you looking for right equity funds for your investment portfolio? Then ELSS mutual funds are an ideal investment option for you. This article focuses on ELSS investments and why ELSS funds are an ideal investment option for your portfolio if you wish to expose your portfolio to equities. Let’s begin by understanding what is ELSS.

What is ELSS?

Equity-Linked Savings Scheme or ELSS are a type of mutual funds that invest a majority of their assets (at least 80% of their investment portfolio) in equities and equities-related securities. ELSS funds are also known as tax saver mutual funds as these mutual funds are eligible for a tax deduction under Section 80C of the Income Tax Act, 1961. An investor can claim a tax deduction of up to Rs 1.5 lac per annum. This means that you can save up to Rs 46,800 each year if you belong to the highest tax bracket. ELSS fund provide dual benefits to investors in terms of wealth creation and tax-saving opportunities. These mutual funds have a lock-in period of three years.

Benefits of ELSS mutual funds

Following are some of the advantages of investing in ELSS tax saver mutual funds:

  1. Shorter lock-in period
    ELSS mutual funds enjoy the lowest lock-in period among other section 80C investments. Other investments under Section 80C such asNational Savings Certificate (NSC), Bank Fixed Deposits (FD), Employees’ Provident Fund (EPF), Public Provident Fund (PPF) hold a lock-in period years, 5 years, 5 years, and 15 years respectively.
  2. Higher ROI
    As ELSS allot majority of their assets towards equities, and equities are an amazing asset class for wealth creation, investing in ELSS funds helps to generate higher rate of returns on investments.
  3. Flexibility with ELSS funds
    ELSS mutual funds offer higher level of flexibility to investors as compared to other tax-saving investments. When you invest in Unit-Linked Insurance Plans (ULIP), even if you are unhappy with your investments, you can shift your investments in mutual funds that are just offered by that particular ULIP. On the other hand, ELSS funds do not obligate investors to commit to multi-year deal as they can shift to another fund if they are unhappy with their ELSS investments.
  4. Tax-saving benefits
    Apart from the Rs 1.5 lac tax deduction per annum offered under Section 80C of the IT Act, 1961, ELSS investments also provide investors with other tax saving opportunities. ELSS funds attract LTCG (long-term capital gains) on their investments. Capital gains below Rs 1 lac are exempt from tax and capital gains above Rs 1 lac are taxed at 10%.

Even though ELSS investments have a lock-in duration of just three years, mutual fund advisors recommend investors to stay invested for a longer duration. In fact, they suggest investors to link their ELSS investments with their long-term financial goals. This will ensure that you stay invested for a longer duration which will allow your ELSS investments to grow at their maximum potential. Also, this will also ensure that you do not exit the schemes at the slightest hint of uncertainty or volatilities. Hence, it’s a win-win situation. Happy investing!