What are the benefits of investing in ELSS Mutual Funds

Dec 11, 2017 / Priyanka Chakrabarty | 101 Downloaded | 5494 Viewed | |
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The only motive behind investing money is not having to work hard the entire life. We earn till a certain age and the rest of the life we wish to eat the fruits of the plants we had already planted in the earlier stage and the plants can be planted only by smart thinking. There are only two ways of thinking smart, either by working very hard or by making your assets work for you. If you intend to save money by keeping it in your bag, it doesn’t happen and also it does not lay eggs. If you want your money to lay eggs or rather multiply, you have to invest them somewhere to generate ‘Your Money plus Interest’. You may invest in stocks, bonds, options, futures, mutual funds, real estate, precious metals, own business, etc.

Equity investors are usually cautious about losing money in the market. Whereas smart investors are cautious about saving money and investing with a long term perspective.

If you have long-term financial goals, equity mutual funds can be one of the best vehicles to achieve the goal. One of the primary benefits of investing in equity mutual funds is to get capital appreciation benefit. It is one of the financial instruments which can give you high inflation beating returns and hence one can accumulate good amount of wealth over a period of time.

When you invest in equity mutual funds it gets spread into considerable sectors reducing the risk of losses in future. Therefore, if some stocks underperformed, the outperforming ones can make up for the losses, hence it minimises your market risk in your overall portfolio. However, one cannot escape all risks even having a well-diversified portfolio.

Anyone and everyone can invest in equity mutual fund through SIPs (Systematic Investment Plan) mode. One can start investing with just Rs 500 a month. A SIP allows regular periodic investments through ECS (Electronic Clearing Service) where money gets automatically deducted from your bank account every month at a predetermined date. This inculcates a persistent habit of continuous investing also.

What are ELSS Mutual Funds

An Equity Linked Savings Scheme or ELSS is a type of diversified equity mutual fund which has majority of the corpus invested in equity related products. Since it is an equity fund, returns from an ELSS fund reflect returns of the equity markets.

ELSS Funds are open-ended fund which not only helps you to save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemption under Section 80C of the Indian Income Tax Act, 1961, and offers the twin advantage of capital appreciation and tax benefits. It comes with a lock-in period of 3 years.

In terms of performance of the mutual funds, good mutual fund portfolios are constructed keeping long term investments in mind. However, none of them are bound by a lock in period except for ELSS fund, which is locked in for at least 3 years as it offers tax benefit. It means one is obligated to stay invested for 3 years or more to avail tax exemption on returns. This forcefully inhibits a good habit to stay invested for a long term.

Although, the lock in period for ELSS is 3 years, you may choose to allow the continuous growth of your fund for longer period or redeem after 3 years. Inherently, equity investments are subject to market risks. But since these funds invest your money in equity, you possess the chances of higher returns with tax exemption.

ELSS also allows you the benefits of equity mutual fund schemes to ride the growth cycle of stocks in your ELSS portfolio. Where traditional savings can give about 6-8% of returns, investing in ELSS equity mutual funds may produce higher returns in favourable situations in the stock market. In the rising economy like India, a good portfolio with quality stocks may reap higher returns.

ELSS funds are one of the best avenues to save tax u/s 80C. This is because along with the tax deduction, the investor also gets to see the sunny side of investing in the equity markets. Also, no taxis levied on the long-term capital gains from these funds. Moreover, compared to other tax saving options, ELSS has the shortest lock-in period of 3 years. Other investment products that provide tax benefit u/s 80C like insurance, PPF, National Savings Certificate (NSC), Employee's Provident Fund (EPF) have a minimum lock-in period of 5 years.

Below is a comparison of lock-in periods of various tax saving options in India:


Comparison of lock-in periods of various tax saving options in India


You can find the comparison of ELSS with other few popular options as below:


Comparison of ELSS with other few popular options

*Current rate only. Interest rates are reset every quarter, linked to prevailing government security rates. **There is no upper limit on investments. However, investments of only up to Rs.150,000 per year are allowed to be claimed as deductions under Section 80C of IT Act.


ELSS funds are suitable for whom?

ELSS is meant for either who are just starting out in their careers but their earning is taxable or for others who are saving in other traditional instruments and may not be aware about ELSS mutual funds.

ELSS is the kind of investment that does not have any age limit. One can start as early as possible or also those who are aged but willing to take some amount of risk with their investments. ELSS is also for the kind of people who do not believe in putting all eggs in one basket.

Let’s now take a quick glimpse of the advantages of investing in ELSS mutual fund.

  • Ideal for persons from every economic background including business persons, senior citizens and salaried employees

  • Long term financial growth via appreciation of capital

  • Can be invested using SIP with minimum and affordable investment amount being just Rs. 500 a month.

  • Investment can be done online very quickly and easily

  • Minimum lock-in of just 3 years which is considerably less in comparison to other tax saving options

  • Can earn returns that are substantially higher than the rate at which people invest in traditional tax saving options

  • Earnings i.e. the returns, dividends, and the long term capital gains post the 3 year lock in period are 100% tax free

  • The concept of compounding returns help to earn in multiples of the principal amount invested.

  • There is no maximum limit to invest

But are there any disadvantages of investing in ELSS mutual fund? Let us see -

  • Market related risks are unavoidable as ELSS invests in equities.

  • Premature withdrawals cannot be made during the lock-in period of 3 years.

  • Too many choices of ELSS schemes in India adds to investment confusion and thus very difficult to decide upon a suitable fund to invest in. However, a bit of research and help from a financial advisor can make it easier.

  • There are no guaranteed returns, as ELSS is equity oriented mutual fund schemes which makes it subject to market returns.

Tax implications

ELSS mutual funds also have an added advantage as they fall under 'EEE' category, which means the amount you invest in an ELSS fund, the returns/dividends and the maturity amounts are tax exempted. However, in some other tax-saving avenues like NSC, the amount you invest is only tax-free but the returns are not.

One can invest up to Rs. 1.50 Lakhs in ELSS funds in a financial year and can get tax benefit on that. However, you can also invest more than Rs. 1.50 Lakhs in an ELSS mutual fund in a financial year but the excess amount over Rs. 1.50 Lakhs won't qualify for tax benefit under section 80C. ELSS mutual funds invest more than 65 per cent of their corpus in equity or equity related instruments.

Tax saving of up to Rs 46,350 can be achieved by making an investment of Rs 150,000 where the investor falls in the top income tax slab of 30 percent (inclusive of applicable cess of 3 percent). However, the tax saving may differ depending on applicable tax slab of an individual and moreover, the investments made u/s 80C of the I-T Act.

Options available while investing in ELSS fund:

GROWTH OPTION

– In this case the holder will not get any benefit in the form of dividends. He will only receive the benefits at the end of the tenure which will help appreciate his NAV and thus multiply his profits. However, this is completely dependent on the market conditions.

DIVIDEND OPTION

– In this case the investor gets benefit of dividends as compared to a lump sum amount at the end. The best part is any dividend that the investor receives is not liable for taxation by the government and he will receive the entire amount as tax free.

DIVIDEND REINVESTMENTS OPTION

– This option is not available in case of ELSS Funds.

What should you look in an ELSS fund?

Remember to do thorough research when you invest in an ELSS fund. You must look at the long term performance of the fund before putting your money in it. Also remember to look at the fund details like the fund manager’s investment approach, scheme portfolio, the expense ratio and the fund volatility.

Conclusion

ELSS not only saves your taxes but also helps you in achieving your desired medium and long term financial goals of life. Returns of ELS funds are much higher than other traditional investment options like PPF. For example, by investing Rs 10,000 through monthly SIP in the last 10 years in an average ELSS Fund could have got you a corpus of Rs 24 Lakhs (12.5% annual XIRR returns) compared to Rs 18.68 in PPF (assuming 8.25% average returns) against your investment of Rs 12 Lakhs during the period of 10 years.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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