Know the basics of ELSS: The tax-saver and wealth-enhancer


Equity Linked Saving Scheme (ELSS) is a special type of equity mutual fund which helps the investor to save tax and to get a substantial return. In this article, the author discusses the ELSS. Read to know about this special category of mutual fund.

Almost all the salaried individuals know about Section 80C of the Income Tax Act. A person can save tax up to Rs. 1,50,000/- every year under the provision of this particular Section of this Act. There are some specific investment instruments which are eligible for the benefit under this Section. The most notable instrument is Provident Fund. All the salaried individuals save tax under various types of Provident Fund. In addition to Provident Fund, people save tax under Section 80C by various other options like National Savings Certificate (NSC), Tax-saving Bond, etc. However, it has been noted with serious concern that the return from these instruments has been diminishing over the years. As for example, the rate of interest in Provident Fund has decreased from 12% p.a. to 7.6% p.a. Now, the situation has become very alarming and the return from these tax-saving instruments can't match the annual inflation. So, in real term, the investor does not get any inflation-adjusted return from these instruments. So, the investors are searching such instrument which is tax-saver as well as wealth-enhancer. ELSS is the answer. Let us know about this investment instrument.



What is ELSS

The full form of ELSS is Equity Linked Savings Scheme. It is basically an equity-based mutual fund scheme. The fund manager invests in various shares (large-cap, mid-cap or small-cap) as per the mandate of the scheme. A minimum of 65% of the total asset is invested in the stock market. It is not thematic or sectoral fund, it invests in a diversified stock market.

Difference between ELSS other equity-based fund schemes

As already stated, ELSS is a diversified equity-based mutual fund scheme. Then what is the difference between ELSS and other equity-based schemes? The major difference is that investment in ELSS is eligible for Tax rebate under Section 80C of the Income Tax Act. Other major difference is that unlike other equity-based schemes, ELSS has a minimum lock-in period of three years. This means that an investor can't redeem partially or fully within three years of investment in an ELSS.

Points to be noted by the first-time investors

As already stated, ELSS is a tax-saver. But why it is called wealth-enhancer? Because ELSS can provide the greatest return among the tax-saving instruments. But to invest prudently in ELSS, the first-time investors should remember the following points:-

  1. There is a lock-in period of three years in ELSS. The invested amount can't be redeemed within three years under any circumstances.
  2. Although the lock-in period is three years, an investor can keep the invested amount in ELSS for more than three years.
  3. There is no maximum limit of investment in ELSS, but the tax benefit will be only on Rs. 1,50,000/- annually.
  4. Although there is a provision of SIP in ELSS, the investors should not invest in ELSS via SIP route.
  5. It must be clearly understood that within the broad category of ELSS, there are various types of schemes. Some schemes invest largely in large-cap funds. Some ELSS invest mainly in mid-cap funds and some ELSS may give stress in small-cap funds. So, investors must invest in ELSS prudently as per their risk-taking capabilities.
  6. While choosing ELSS, the investors must study the mandate and the previous return for at least last five years, yearly basis. They must check the chosen ELSS's performance vis-à-vis benchmark return.




Final few words

Among the tax-saving instruments, ELSS has the capability of providing the maximum return by conveniently beating the inflation rate. So, investors can use this instrument for tax saving and enhancing their wealth in real term. Investors must invest in ELSS after studying the variety of options available under this category and choosing the most convenient ones for themselves.


Article by Partha K.
“Those who will not reason, are bigots, those who cannot, are fools, and those who dare not, are slaves.” - George Gordon Byron

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Comments

Author: Umesh09 Apr 2018 Member Level: Diamond   Points : 6

A nice article bringing out the features of ELSS mutual fund schemes.

For those investors who are not having PPF, CPF/EPF, LIC, HBA interest etc or other such investment avenues where they can take advantage of section 80C by deducting an amount of 150000 from gross income, ELSS becomes a good choice as they can claim now the benefit of invested amount as deduction from gross income as per the above limit. For others it is only a redundant investment as tax benefit is already taken through PPF, CPF/EPF, LIC, HBA interest etc.

Still being an equity oriented scheme it has a good potential for growth and one can invest in it considering its wide portfolio as well as flexibility in changing the ratio of equity and debt instruments in the fund corpus depending upon the market conditions.

A good fund manager can take advantage of these flexibilities and that is the reason why some ELSS funds have performed magnificently in the past.

Author: Partha K.13 Apr 2018 Member Level: Platinum   Points : 3

Thanks to Mr. Umesh for reading this article on ELSS, a special investment vehicle for tax-saving. Many financial experts think that among all tax-saving instruments, only ELSS has the ability to enhance the wealth in real term. So, they advise the common investors to invest a substantial amount of Section 80C limit in this instrument.

However, the first time investors must remember that within ELSS, there may be some schemes which invest more in large-cap scripts and some schemes investment in mid-cap scripts. The investors must choose ELSS keeping in view their risk profile. Furthermore, the minimum lock-in period in ELSS is 3 years, but it is not mandatory to withdraw money immediately after three years. Considering the market, the investors can stay invested in the ELSS for more than three years.

Considering the benefits of ELSS, common investors may choose a proper scheme for their own and invest in the chosen scheme for tax benefits under Section 80C and real-term appreciation of invested amount.



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