Finance

Everything about ELSS: Tax-saving mutual funds

Most investorsperceive equity as a risky investment; andwhile equity-based investmentsdo attract market risk, they also offer long-term benefits tothe investors. Among the many types of investments available in the Indian market, Equity-Linked Savings Schemes (ELSS) are a highly sought-after investment avenue.

Before you choose ELSS funds for your investments, let’s understand themin detail:

What is an Equity-Linked Savings Scheme (ELSS)?

As the name suggests, an ELSS fund is an equity-oriented fund.ELSS funds are funds that invest in equity and related instruments of different companies. Since ELSS funds areskewed towards equity and related instruments, you tend to receive higher returns on the investment.

However, the most beneficial aspect of ELSS fundsis that they allow you to claim a tax deduction of up to Rs. 1.50 lac under Section 80C of the Income Tax Act, 1961. Moreover, unlike other tax-saving instruments such as a Public Provident Fund (PPF) or National Savings Certificate (NSC), an ELSS fund has the shortest lock-in period of three years.

ELSS funds allow you to reap the following advantages:

  • Shorter tenure

Among all the Section 80C investments, ELSS funds are the only tax saving mutual funds with a tenure of three years. Despite the shorter tenure, they can provide high returns to investors. You can link your short-term aspirations to your ELSS investments to save tax as well as to realize said goals.

  • High returns

Although equity-based investmentscan tend to be volatile in the short-term, ELSS funds can still beat different asset classes when it comes to the return on investment (RoI), including fixed-income assets. Unlike other 80C instruments, such as Public Provident Fund (PPF) and National Savings Certificate (NSC), ELSS fundshave the potential to generate high returns over the investment tenure. Moreover, ELSS fundscan be a great investment tool for funding your child’s education or building your retirement corpus over the long-term due to its potential to createwealth.

  • Minimum investment amount

With ELSS funds, you do not have to worry about investing huge sums of money. To invest in ELSS funds, you can start periodic investmentsthrough a Systematic Investment Plan (SIP) with a minimum amount of Rs. 500. An SIP can help you develop financial discipline throughoutan investment.

ELSS fundsare a popular investment tool in the Indian markets. Although anyone can invest inELSS funds,the following can reap the maximum benefits:

  • Investors who can bear market risks without the fear of volatility
  • Young investors with fewer financial responsibilities and an appetite for high risk
  • Any individual or member of a Hindu Undivided Family (HUF)

While choosing ELSS funds, look at these parameters to ensure that you reap the best results:

  • Run a background check on the fund’s historicalperformance
  • Choose an ELSS fund with a low expense ratio. A fund’s expense ratio indicates how much of your invested capital will be directed towards fund management
  • Evaluate different financial parameters such as alpha and beta, Sharpe ratio, standard deviation, etc.

To sum up, investing in ELSS funds can be quite daunting. If you are not well-versed with the concept, you can consult a financial expert to simplify the cumbersome process. Happy Investing!

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