The primary purpose of any equity mutual funds scheme is to offer capital appreciation over the long term. It is unfair to expect your equity oriented schemes to outperform over the short term because these investments fluctuate depending on the daily fluctuations in the equity markets. Also, historically equity mutual funds have outperformed their underlying benchmark and offered far better returns than conservative schemes when one remained invested in them for a period of 10 to 15 years. But not all equity mutual funds are able to offer the dual benefit which ELSS offers?
To understand more about ELSS fund, continue reading.
An Equity Linked Savings Scheme (ELSS) is an open ended mutual fund scheme that comes with a three year lock-in and tax benefit. What distinguishes a mutual fund scheme from other equity schemes is that one can invest up to Rs. 1.5 lakhs per fiscal year in this tax saving scheme and claim tax deduction for the same.
Here’s an example to help you understand how ELSS works –
Neha Mathur is a senior marketing manager with an entertainment agency who draws and annual salary of Rs. 14 lakhs. This lands her in the highest tax bracket. Neha learns about ELSS from a friend and decides to invest Rs. 1.5 lakh in the tax saver fund. Now according to 80C of the Indian Income Tax Act, 1961 an individual can invest up to Rs. 1,50,000 in ELSS and claim tax deductions for the same. By investing in ELSS Neha’s gross taxable income has now come down to Rs. 12.5(14-1.5) lakhs per annum. Also, the three year lock in gives her an opportunity to build wealth over the long term.
ELSS comes with a three year lock-in period
ELSS is probably the only equity mutual funds scheme to come with a predetermined lock-in period of 36 months. Having said that, this lock-in period is still the probably the lowest among other tax saving instruments that come under Section 80C of the Indian Income Tax Act, 1961. Also, one does not need to redeem their ELSS fund units at the end of their three year lock-in period. If the mutual fund scheme you invested in is performing as per your expectations, you can remain invested to enjoy the interest that you continue to accrue over the long term.
Invest according to your risk appetite
Although it is true that investors cannot claim tax deductions for amounts exceeding Rs. 1.5 lakhs, there is not upper limit for investing in an ELSS scheme. Depending on your investment objective and appetite for risk, you can invest as much as you want as long as you are not over investing. Remember, the aim is to grow your existing wealth and not to put your entire finances at risk.
Start a monthly SIP
If you wish to inculcate the discipline of regular investing, then you can start a monthly SIP in ELSS fund. A Systematic Investment Plan is an easy and hassle-free investment approach where retail investors can invest a fixed amount at regular intervals. Tax saving might not have been this easier before but by starting a monthly SIP, you assure that you save tax and also gradually build your ELSS corpus. The biggest plus point is that investors can start investing with a SIP as low as Rs. 500 per month. Also, you can refer to a free online tool like SIP Calculator which gives you a rough estimate on the capital gains that you might earn at the end of your investing journey.
ELSS is a high volatile scheme and hence, investors are expected to talk to their financial advisor before investing.