Investors must choose ELSS only if it matches their risk appetite as these funds invest in companies across market capitalisation.
Many salaried professionals have opted for equity-linked savings schemes or ELSS recently to save tax. ELSS is an equity diversified mutual fund that qualifies for tax deduction of up to Rs 1.5 lakh per year under Section 80C of the I-T Act, 1961. Investors who have a higher risk tolerance invest in ELSS to save taxes and generate wealth over the long term.
ELSS has unique advantages as compared to other tax-saving investments under Section 80C. They are one of the few investments under Section 80C that offer an option to invest in equity schemes. Moreover, they have the shortest lock-in period of only three years among all the Section 80C investments.
ELSS offers novice investors an opportunity to invest in equity mutual funds. Mutual fund advisors recommend that you invest in equity mutual funds for a minimum of three years to achieve your medium-term financial goals.
First-timers in equity are attracted to ELSS because of the tax-saving and the shortest lock-in period among Section 80C investments. However, the lock-in period of three years ensures that investors stay with the investment giving them the best chance to earn a higher return.
ELSS offers individuals in the highest income tax bracket the opportunity to save taxes up to Rs 46,800 per year through Section 80C. However, other investments clubbed under Section 80C make this a collective deduction up to Rs 1.5 lakh per annum.
ELSS is a tax-efficient investment for those in the highest tax brackets compared to bank fixed deposits, including tax-saver FDs. They are taxed as equity-oriented funds where the long term capital gains up to Rs 1 lakh are tax-free. However, the interest you earn from bank FDs are added to your overall income and taxed according to your income tax bracket.
ELSS is one of the best tax-saving investments to create wealth over the long run. As ELSS invests mainly in equity, it has the potential to offer inflation-beating returns over time. According to data from Morningstar, the ELSS category provided an average return of 13% over three years and 14% over five years. Moreover, the tax benefit serves as an added incentive for investors to invest in the ELSS.
You can invest in ELSS through the systematic investment plan or SIP if you don’t have a lump sum. AMCs offer you the facility to spread your investment in the ELSS and average the purchase price of units over time, called rupee cost averaging. Investors can opt for a minimum amount of Rs 500 per SIP instalment to avail of tax benefits and the opportunity to grow wealth over time.
ELSS offers investors the opportunity to benefit from the power of compounding. If you purchase units of the ELSS and stay invested for the long run, you benefit from the power of compounding. You earn a return on the principal amount as well as the returns you make over time.
Investors must invest in ELSS as early as possible and stay with the investment for the long term to maximise the power of compounding benefit. Experts recommend that you continue with the ELSS beyond the three-year lock-in period to maximise your investment return.
You must pick the appropriate ELSS to maximise the return on your investment. Investors must choose ELSS that has performed consistently well against the benchmark and peers over time. It helps if you pick an ELSS with a lower expense ratio to maximise your return over time.
Investors must choose ELSS only if it matches their risk appetite as these funds invest in companies across market capitalisation. You must pick an investment that helps you achieve your financial goals rather than focus only on tax savings. ELSS can generate a higher return and save taxes to create wealth over the long term.
by, Archit Gupta, Founder and CEO – Clear