Everything you wanted to know about ELSS

An ELSS is a diversified equity fund — a mutual fund that invests in stocks and is not concentrated in a sector or market category, and is thus a less risky way to invest in the market— with a three-year lock-in. Within the tax-saving set, it is the only one that offers a pure equity exposure. If you can take the risk of equity, an ELSS is the most attractive tax-saving vehicle today, and there are three reasons to eye it like never before.

What is an ELSS?

As the name of the scheme very clearly suggests, it is a savings scheme that’s linked to equity. And these are the two most important facts to remember even after investing in an ELSS. A savings scheme must necessarily be for the long term, so it’s of no use looking at short-term returns from an ELSS. ELSS is a mutual fund similar to any diversified equity mutual fund that routes your investments into equity markets. However, it stands apart from a regular mutual fund in one major way. ELSS carries a tax benefit on the amount invested, and therefore you have to lock-in your investment in an ELSS for three years.

Features of ELSS

Proxy route to direct stock investments
Lock-in feature provides long-term investing discipline
Provides tax saving benefits and the potential for higher returns
Flexibility to invest small amounts through an SIP

Who can buy?

Section 80C of the Income Tax Act provides tax benefits to a person who buys units of ELSS, either in his own name or jointly. Individuals, HUF

What is the minimum & maximum amount of investment?

Investments can be made through a systematic investment plan (SIP) or lump sum. When markets are volatile, SIP is a better way to invest, save tax and create wealth over a long term. Minimum Amount of investment is Rs.500. There is no limit for maximum amount of investment; however the tax advantage is only up to Rs.1lakh.

With SIP investor can take advantage of fluctuations in the stock market. So investor will get more units when the market is down and get less units when the market is up. For eg if you are investing Rs 1000 every month and you will get 100 units for when Net Asset Value (NAV) is 10 and will get 50 units when NAV is 20. So investing a fixed sum regularly helps to cover the market fluctuations by rupee costs averaging. SIPs are a tried and tested method of minimizing risk and yet enjoying good returns, by regular, periodic investment, over a long horizon.

How is Tax saved?

Investments in ELSS plans are eligible for deduction from gross total income under Section 80C of Income Tax Act. Only Rs.1lakh of investments qualifies for tax benefits under the same section. Your gross income is reduced by the amount you invest in the scheme. If you are paying a tax of 30.9% you can save upto Rs.30, 900/- on an investment of Rs.1lakh or more in ELSS.

Comparison with other options

ELSS has a lower lock-in period compared to other tax saving options. PPF, a tax-saver option is a 15year savings plan, while the National Saving Certificate carries a lock-in of 6years.

Benefits of ELSS

The three year lock-in stipulation might seem harsh, but it has its advantages, it induces discipline into your investing habits. You can lock yourself in low valuations, but also have to give your investment time to work for you. This lock-in keeps corporate money out, which means these schemes do not have to deal with sudden, large scale redemptions. Thus, ELSS tends to have more stable and optimum corpus size, which encourages good fund management.

Why ELSS:

  • Investors in ELSS under Dividend Payout Option have the advantage of getting Tax Free gains even during the lock-in period of 3 years.
  • Lowest Lock-in period of just 3 years, comparing favorably with maturity period of NSC (6yrs) and PPF (15 years).
  • Minimum investment is only Rs.500. very low entry barrier.
  • Investors in ELSS have the advantage of investing through Systematic Investment Plan.
  • Some ELSS schemes offer Free Life Insurance Cover and also Personal Accident Death Cover and even Critical Illness cover!!!
  • Historically, provided better returns than NSC, PPF and ULIPs.
  • Profits earned after the Lock-in Period is completely Tax-Free.
  • Upto Rs.1Lakh is eligible for deductions under Section 80c compared to Rs.70000 in PPF.
  • Due to its 3 year lock-in period, the Fund Manager has the freedom to invest in Fundamentally Strong Shares with huge future potential and can afford to ‘wait’ to unlock the value. Thus, it has been observed that ELSS schemes do beat (in terms of returns) even Diversified Mutual Funds more often than not.

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