Today there are so many mutual fund categories that you will find schemes catering to the needs of almost every individual. This is why financial advisor ask retail investors to first understand their appetite for risk before investing in mutual funds. Although mutual funds have historically offered far better returns as compared to conservative schemes, some funds like equity schemes are highly volatile in nature. Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities for income generation.
ELSS is an open ended mutual scheme introduced for those looking to invest in a tax saving instrument. ELSS is a better tax saving scheme as compared to traditional tax saving schemes for several reasons. ELSS is probably the only investment scheme that comes with a tax benefit. Also, since this scheme comes with a predetermined lock in period of three years, investors cannot withdraw their ELSS funds for a minimum period of 36 months from the date of investment. However, the three year lock in period is probably the shortest among other tax saving instruments.
Here’s an example to help you understand how equity mutual funds like ELSS work:
Investors can invest up to Rs. 1.5 lakhs in an ELSS scheme and claim tax exemption for this investment amount. That’s because according to the Section 80C of the Indian Income Tax Act, 1961 an investor can invest up to Rs. 1.5 lakh per fiscal year in ELSS funds and claim tax deduction from their gross annual income. So, if you earn Rs. 12 lakhs per annum and invest Rs. 1,50,000 in ELSS funds you can bring down your annual tax liability to Rs. 10.5 lakhs.
What are some of the benefits of ELSS fund investments?
The biggest advantage of an ELSS scheme is that it comes with a tax benefit. Since ELSS is probably the only mutual fund scheme to offer that, it has an upper hand over other equity mutual funds. Apart from helping investors get rid of their tax woes, the three year lock in ensures that the invested amount continues to grow and accrue interest over the long term. Also, there is no upper limit for investing in ELSS, however one cannot claim for tax deductions exceeding Rs. 1.5 lakhs for their investments in ELSS schemes. There are some fund houses which offer the option of investing an amount as low as Rs. 500 per month in ELSS which makes it an approachable investment choice for almost everyone.
Are ELSS investments entirely risk free?
Although ELSS funds offer investors with a tax benefit, they cannot be termed risk free. As the names suggest, an ELSS schemes aims at generating capital appreciation by predominantly investing across company stocks and other equity related instruments. In fact, with an equity oriented portfolio, ELSS become a high volatile investment. That’s because equity funds like ELSS are prone to market’s volatile nature. Over the short term, one can even incur losses from their ELSS investments. This is why most ELSS investors prefer the option of investing in ELSS via SIP. Systematic Investment Plan (SIP) is an easy and convenient way to invest in mutual funds. With SIP, investors needn’t worry about market vagaries as only the amount which invest monthly is exposed to market’s volatile nature. Also, the three year lock in assures that investors are able to build a decent corpus using ELSS funds.
ELSS funds carry a high risk rewards ratio. If the ELSS fund that you invested in is giving decent returns even after the lock in period, investors can continue to remain invested instead of withdrawing the fund. However, ELSS doesn’t offer guaranteed returns and thus, investors are expected to determine their appetite for risk before investing.