ELSS is an abbreviation for Equity Linked Saving Scheme. ELSS is an equity-oriented mutual fund scheme wherein at least 65% of the portfolio is invested in equity stocks and securities. Thus, ELSS schemes are exposed to market volatility but have the potential to generate attractive returns.
ELSS schemes are different from other types of mutual fund schemes because of two main reasons –
ELSS funds have a compulsory lock-in period of 3 years. This means that the investment that you do in an ELSS fund is locked-in for 3 years. You cannot withdraw the investment before the lock-in period is over.
ELSS gives you an added tax advantage. The investment into the scheme qualifies as a deduction under Section 80C of the Income Tax Act, 1961
Besides these two unique features, ELSS is like any other equity mutual fund scheme which comes with a high-risk high return profile.
There are distinct advantages of investing in ELSS funds which are why these funds are popular. These advantages are as follows –
Ease of investment
You can choose to invest in an ELSS fund either in a lump sum or in instalments through Systematic Investment Plans (SIPs). The investment starts as low as Rs.500/month and can be done online making it easy for investors.
Like other mutual funds, ELSS funds are also managed by professional fund managers who know where to invest the corpus for maximum gains. Thus, investors with limited market knowledge can trust their investments to be managed professionally for maximum returns.
Being an equity-oriented fund ELSS has a high potential of generating returns on your investment. Since the equity market can yield exponential returns, you can get the benefit of wealth maximization through ELSS investments.
The tax angle
Lastly, the tax benefit allowed by ELSS makes them an in-demand product. You can save tax up to Rs.45, 000 (if you are in the 30% tax bracket) by investing up to Rs.1.5 lakhs in an ELSS scheme. This benefit is allowed under Section 80C of the Income Tax Act, 1961. Moreover, returns earned from the investment are also tax-free up to Rs.1 lakh. If the returns exceed Rs.1 lakh, the excess is taxed at 10%. ELSS funds, therefore, help you plan your taxes effectively and also create wealth in the process
You can invest in ELSS scheme through TradeSmart’s mutual fund mobile application TradeSmart MF. Download the app from Google Playstore, follow the simple and easy registration steps and start investing.
So, invest in ELSS scheme for saving taxes and creating wealth. Choose TradeSmart’s mobile app for easy and hassle-free investing.
TradeSmart’s easy mobile application allows you to invest in mutual funds and ELSS schemes in the easiest possible manner. Here are some benefits of opening your mutual fund account through TradeSmart –
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Yes, switching is allowed and you can switch out of the ELSS scheme into another scheme and vice- versa. However, the switching is allowed only after the lock-in period of 3 years is over.
If you invest in ELSS through SIPs, every SIP instalment would have an independent lock-in period of 3 years. So, suppose you start investing in SIP from January 2021. The first instalment of January 2021 would be available for redemption in January 2024. The second instalment in February 2021 would be available in February 2024 and so on.
The returns earned on redemption would be Rs.50, 000, i.e. Rs.1.5 lakhs – Rs.1 lakh. Since the return is below Rs.1 lakh and assuming you do not have any other equity returns, there would be no tax liability. The entire redemption value would be tax-free in your hands.
The investment strategy of an ELSS fund is determined by the fund manager. At least 65% of the fund is invested in equity. Of the remaining, the fund manager might invest a part of the corpus in debt instruments for stability. So, there is no rule against debt investment. ELSS funds can invest in debt but at least 65% of the portfolio should be exposed to equity.
Under Growth plans, the returns earned by the portfolio are reinvested in the scheme itself while under Dividend plans a part of the returns are distributed among investors in the form of dividends. Thus, Growth plans do not offer periodic returns. They provide capital appreciation and a lump sum amount when you withdraw. Dividend plans, on the other hand, offer periodic dividends and a lump sum amount when you withdraw. This lump sum amount, however, is lower than that provided by Growth plans.