In India, generally, people are attracted to tax-saving instruments like Post Office Saving Scheme, PPF, etc. However, these instruments provide low returns which may not help an individual to meet their short-term goals as they are long-term investment instruments and provide a low rate of return.
One must include the above instruments in their portfolio to maintain stability, yet one also needs some such investment instruments which provide high returns which will help them to build wealth.
Hence, mutual funds offer Equity Linked Savings Schemes (ELSS) which provide tax-efficient returns. It is the only mutual fund category that offers twin benefits of wealth creation and income tax benefit under section 80C, up to Rs. 1.5 lakhs up to the limit.
The fund invests a minimum of 80% of the total assets in equity and equity-related instruments. An Equity Linked Savings Scheme, popularly known as ELSS, is a type of diversified equity scheme which comes, with a lock-in period of three years, offered by mutual funds in India. They offer tax benefits under the Section 80C of the Income Tax Act 1961
What do you need to know before investing?
Diversification: As the name suggests, these funds invest a major chunk of 80% of the total assets in equities. They diversify the corpus and provide favorable returns by investing in different companies in different sectors of the economy.
Investment horizon: ELSS funds have a lock-in period of 3 years; hence, it is mandatory to invest for at least 3 years, but you can invest for a longer period as well.
In fact, it is advisable to invest for long term to get good returns.
Risk Profile: ELSS funds have the potential to provide higher returns, but it also come with risk. Since these funds invest in equities, the risk is much higher as compared to other tax-saving schemes.
Anyone who wants to invest in these schemes should assess their risk appetite and proceed to invest. Since the market is volatile, these funds become a risky investment. You should not invest just for tax-saving opportunities.
Mode of Investment: You can invest through SIP as well as lump sum amount. The most preferred, SIP is chosen as it gives the option of investing in a small amount and at the same time, provides the benefit of rupee cost averaging.
Investing in a lump sum can be risky if you invest during a bullish market. However, you can invest a lump sum amount when the market tolerates it. The minimum amount of investment with which you can start SIP in ELSS is Rs500 and there is no capping for the maximum investment. Tax Benefits: Tax benefits are the most attractive aspect of these funds. You will get up to Rs1.5 lakh tax deduction available under 80C of the Income Tax Act, 1961.