Equity Linked Saving Schemes (ELSS): Everything you need to know

Equity Linked Saving Schemes (ELSS) are a type of mutual fund investment that offer tax benefits to investors in India. They are designed to provide both capital appreciation and tax savings. ELSS funds invest a major portion of their corpus in equity and equity-related securities and aim to generate long-term capital growth. With the dual advantage of tax savings and the potential for high returns, ELSS has become a popular investment choice among individuals looking to grow their wealth while also saving on taxes.

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EQUALITY LINKED SAVING SCHEMES IN RECENT NEWS

  • Budget 2023 May Diminish ELSS Attractiveness, but Don’t Halt Your Investments
  • Budget 2023: Mutual Fund Industry Calls for Debt-Linked Saving Schemes to be on Par with ELSS.

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TYPES OF ELSS:

There are two types of Equity Linked Saving Schemes (ELSS) available to investors:

  • Growth Option: In this option, the primary focus is on capital appreciation and the returns generated are reinvested in the fund. Investors receive the full amount of the NAV (Net Asset Value) upon maturity or redemption.
  • Dividend Option: This option aims to provide regular income to investors in the form of dividends. The dividends are generated from the fund’s earnings, and the amount is paid out to the investor, either in cash or by reinvestment into the fund.

Both growth and dividend options have their own unique benefits and suit different investment goals and styles. It’s important for investors to understand their own investment objectives and risk tolerance before choosing between the two options. A financial advisor or a mutual fund expert can also assist in making the right choice based on an individual’s financial profile and goals.

INVESTMENT STRATEGIES FOR  ELSS

Investing in Equity Linked Saving Schemes (ELSS) requires a well-thought-out investment strategy to maximize returns and achieve financial goals. One popular strategy is to opt for a systematic investment plan (SIP) where an investor can invest a fixed amount at regular intervals, typically monthly. This helps in averaging out the cost of investment and reduces the impact of market volatility. Another strategy is to invest lumpsum amounts at regular intervals, for instance, annually, taking advantage of market dips. It’s also important to review and rebalance the portfolio periodically to ensure that it aligns with an individual’s financial goals and risk tolerance.

Investors can also diversify their ELSS portfolio by investing in different types of ELSS funds that cater to different market segments, such as large-cap, mid-cap, and small-cap funds. This helps in spreading the risk across different sectors and market capitalizations.

It’s also crucial to have a long-term perspective while investing in ELSS, as they have a lock-in period of three years. This helps in avoiding premature withdrawals and promoting a long-term investment mindset. It’s important to remember that ELSS is an equity-oriented investment and may come with a higher level of risk compared to debt-oriented investments. However, with a well-crafted investment strategy, ELSS can be a valuable addition to a diversified investment portfolio.

TAX BENEFITS OF ELSS

Investing in Equity Linked Saving Schemes (ELSS) offers several tax benefits to investors in India. ELSS is eligible for tax deductions. Section 80C of the Income Tax Act, which allows individuals to claim deductions up to a maximum limit of 1.5 lakhs INR in a financial year. This not only reduces the taxable income but also helps in lowering the overall tax liability.

In addition to the tax benefits, ELSS also provides the potential for long-term capital appreciation, as a significant portion of the corpus is invested in equity and equity-related securities. This provides the opportunity for higher returns compared to fixed income investments, making ELSS a compelling investment option for individuals looking to achieve their long-term financial goals while also saving on taxes.

It’s important to note that the tax benefits of ELSS are subject to change based on government regulations and policies. Investors are advised to consult a financial advisor or tax expert to understand the latest tax laws and their implications on their ELSS investments.

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RISKS ASSOCIATED WITH ELSS

Investing in Equity Linked Saving Schemes (ELSS) involves a certain degree of risk, as a significant portion of the corpus is invested in equity and equity-related securities. The value of the investment may fluctuate based on market conditions, and there is no guarantee of returns.

ELSS is an equity-oriented investment and is subject to market risks, such as changes in the economic environment, interest rates, and political developments. These risks can impact the performance of the fund and lead to a decrease in the NAV (Net Asset Value) of the fund.

Additionally, ELSS funds are managed by fund managers, and their investment decisions can impact the performance of the fund. Hence, it’s important to choose a reputable and experienced fund manager and monitor the performance of the fund regularly.

Investors should also be aware of the lock-in period of three years for ELSS investments, which discourages premature withdrawals. This can limit the liquidity of the investment and restrict the ability to access funds in case of an emergency.

In conclusion, ELSS can be a valuable addition to a diversified investment portfolio, but it’s important for investors to understand the risks associated with the investment and to make informed decisions based on their financial goals and risk tolerance. Consultation with a financial advisor can also provide valuable insights and help in making informed investment decisions.

HOW TO INVEST IN ELSS

Investing in Equity Linked Saving Schemes (ELSS) is a straightforward process and can be done through various channels. One popular way to invest is through a mutual fund distributor or a financial advisor who can assist in choosing the right ELSS fund based on an individual’s financial goals and risk tolerance.

Investors can also directly invest in ELSS through the mutual fund company’s website or through a stockbroker. The process typically involves opening a mutual fund account and completing the necessary Know Your Customer (KYC) formalities. Once the account is set up, the investor can choose to invest a lump sum amount or opt for a systematic investment plan (SIP) to invest a fixed amount at regular intervals.

It’s important to thoroughly research and compare different ELSS funds before investing and to consider factors such as the fund’s track record, the fund manager’s experience, and the fund’s investment philosophy. Regular monitoring of the fund’s performance and rebalancing the portfolio periodically can also help in achieving investment goals.

In conclusion, investing in ELSS can be a valuable addition to a diversified investment portfolio and can provide the potential for long-term capital appreciation while also offering tax benefits. However, it’s important to understand the investment process and to seek the advice of a financial advisor, if necessary, to make informed investment decisions.

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POPULAR ELSS FUNDS IN INDIA

There are several popular Equity Linked Saving Schemes (ELSS) available in India, and choosing the right one can be a challenge for investors. Some of the popular ELSS funds in India include:

  1. HDFC Tax Saver Fund: This is a well-established ELSS fund that aims to provide long-term capital appreciation by investing primarily in equity and equity-related securities.
  2. Kotak Tax Saver Fund: This ELSS fund focuses on investing in companies with a strong financial track record and a proven ability to generate consistent earnings growth.
  3. ICICI Prudential Long Term Equity Fund: This ELSS fund invests in a diversified portfolio of equity and equity-related securities and aims to provide long-term capital appreciation.
  4. Axis Long Term Equity Fund: This ELSS fund invests in a mix of large-cap, mid-cap, and small-cap stocks and aims to provide long-term capital appreciation.
  5. Franklin India Tax Shield Fund: This ELSS fund invests in a diversified portfolio of equity and equity-related securities and aims to provide long-term capital appreciation while also offering tax benefits to investors.

It’s important to note that the performance of ELSS funds can vary based on market conditions and the investment philosophy of the fund. Investors are advised to thoroughly research and compare different ELSS funds before making an investment and to seek the advice of a financial advisor, if necessary. Regular monitoring of the fund’s performance and rebalancing the portfolio periodically can also help in achieving investment goals.

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FAQ’S

What is ELSS?

It is Equality Linked Saving Schemes.

Is ELSS taxable after 3 years?

No, Equity Linked Saving Schemes (ELSS) are tax-saving mutual funds and the returns earned on these investments are tax-free after a holding period of three years. This means that if you sell your ELSS units after three years, the capital gains you earn will not be taxed.

Is ELSS risky?

Yes, investing in Equity Linked Saving Schemes (ELSS) involves a certain degree of risk. ELSS are mutual funds that invest primarily in equities and equity-related securities, and the returns on these investments are subject to the ups and downs of the stock market. This means that the value of your ELSS investment can fluctuate and may even decline in the short term.

CONCLUSION: EQUALITY LINKED SAVING SCHEMES

Equity Linked Saving Schemes (ELSS) offer a unique combination of long-term wealth creation and tax savings for investors. These mutual funds invest primarily in equities and equity-related securities, providing the potential for higher returns compared to traditional fixed-income investments. 

In short, ELSS can be a valuable addition to a diversified investment portfolio and provides the potential for long-term capital appreciation while also offering tax benefits. With the right investment strategy, ELSS can help individuals achieve their financial goals while also saving on their taxes.