What is ELSS Funds: A Quick Help Guide

ELSS Funds

How do you make your money grow? ELSS or Equity Linked Savings Scheme is one of the best ways to achieve this. With ELSS, you can save tax as well as earn a handsome return on your investment. In order to invest in an ELSS fund, it is important to understand how they work and the various benefits they offer. This quick help guide introduces new investors to the world of ELSS Funds and enables them to become financially secure by investing their hard-earned money wisely. Before taking any step, you must know what is ELSS funds and other details.

What are ELSS Funds?

ELSS funds, also known as Equity Linked Savings Schemes, are mutual fund investments that help you save taxes. These funds invest in equity and equity-related instruments to provide capital appreciation along with tax savings. ELSS funds come with a lock-in period of 3 years, which makes them less liquid than other investment options.

However, their returns tend to be higher than most alternatives since they are invested in the stock market. ELSS offers an attractive combination of tax benefits, liquidity and higher returns compared to traditional saving options like fixed deposits or recurring deposits.

Working of ELSS Funds

ELSS funds are tax-saving mutual funds that invest your money in the equity markets. The fund managers actively manage the investment of your money to help it grow over time. ELSS Funds gives you an opportunity to benefit from capital appreciation and dividend returns depending on the performance of the underlying investments.

The most distinctive feature of ELSS is that it offers tax deductions under Section 80C of the Income Tax Act, 1961 up to Rs 1.5 lakhs per financial year. Apart from this, investors should also keep in mind that like the stock market, investing in equity linked savings schemes involves a certain amount of risk. Therefore, one should go for only those schemes whose risk level they can bear and understand.

ELSS Funds Features:

1. A fixed lock-in time

It is a well-known fact that famous tax savings products like public provident funds or fixed deposits come with a lock-in period. For example, PPF and FD have 15 and 5 year lock-in periods, respectively. However, ELSS funds have a short lock-in time of three years. Therefore, it can give you the choice of withdrawing all your funds before the date in the event of any urgent monetary goals.

2. From the tax viewpoint

Investing up to 1.5 lakh amount every year can save your tax under Section 80C. An amount of Rs. one lakh  is exempt from tax as it is a long term investment. When you earn more than Rs. one lakh in a year, you’ll have to pay 10% LTCG. However, ELSS is continually being famous among Indian investors due to its tax-saving benefits.

Some Factors To Think About Before Investing

1. Horizon of asset

You will require an asset horizon of more than 5 years to consider investing in ELSS funds. ELSS funds must have a longer asset horizon to alleviate market instability due to their equity exposure.

2. Returns

The performance of ELSS funds does not assure a certain return. However, investing for a longer time can offer greater returns than investing over a short period.

3. Period of lock-in

There is a three-year lock-in period for ELSS mutual funds. You cannot redeem your assets until three years have passed since the date of investment.

Best Time To Invest

Most investors invest in ELSS funds at the close of the fiscal year to save tax. However, it is not a good tactic. Tax saving is a vital concern for investing in such types of funds.

Long-term investments are advised in order to get the high return on these funds. Invest through SIP according to your investment goals at the start of the year. You can build wealth over time by investing steadily and continuously for the whole year.

Final words

This blog gives a view of what is ELSS funds and their work, and many other details. Investing in these funds is a better idea to have more tax savings. You can break these funds in between if you need them urgently. Visit the website Aditya Birla Capital to learn more about ELSS funds.