Introduction

There’s this long-established paradigm that states you can’t have your cake and eat it too. That means, if you’re looking to generate strong investment performance and save taxes at the same time, you may have been told that you cannot have it all. But now you can. With ELSS Mutual Funds. Let’s find out how.

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What are ELSS Funds?

Equity Linked Savings Scheme or ELSS Funds are a kind of tax-saving equity mutual funds that invest a considerable portion of your corpus in equities or equity-related instruments. They are regarded as tax saving schemes as they offer an exemption of up to ₹1.5 lakhs from your annual taxable income according to Section 80C of the Income Tax Act.

As a tax-saving scheme, ELSS funds are equity-oriented and come with a three-year lock-in period. The income you earn at the end of the year is regarded as a long-term capital gain [LTCG] taxed at 10% if the gains cross ₹1 lakh.

If you’re looking for the right ELSS funds for your goals, you may want to look into the expansive list provided by ICICI Direct to help you choose a suitable scheme for your objectives.

ELSS fund features

Let’s examine some of the key features provided by ELSS funds. 

  • ELSS funds invest a minimum of 80% of the total investable corpus in equities or equity-related instruments.
  • These funds offer diversification as they invest across market capitalization, sectors and themes.
  • To invest in ELSS funds does not require a maximum tenure; however, it comes with a compulsory lock-in period of three years.
  • You get the twin benefits of enjoying capital appreciation from your ELSS investments in equities along with tax saving options.
  • You can choose to receive dividend pay-outs if you’re looking for a steady income or opt for the growth option that can provide you with capital appreciation.
  • ELSS funds come with some risks intrinsic in equity investments.
  • The income received from your ELSS fund investments is treated as LTCG and taxed according to your prevalent tax lab.
  • ELSS funds are tailored to specific risk levels and investment objectives.
  • Since ELSS funds invest predominantly in the stock market, they can earn market-related yields compared to conventional tax saving instruments.

ELSS fund benefits

ELSS mutual funds give the opportunity of earning reasonable returns and save tax. In addition, there are several more benefits that you can gain from investing in these funds. They are:

  • Portfolio diversification. Given that these funds invest in a wide range of individual securities such as stocks, investing in ELSS funds offer you instant diversification. That means it decreases your investment risk of anyone company performing poorly and dragging down your returns.
  • Tax benefits. While several diversified equity fund options exist, only ELSS funds offer you tax deduction advantages. As stated above, you can gain a cumulative deduction benefit of up to ₹1.5 lakhs according to Section 80C of the Income Tax Act.
  • Low investment amount. You can begin your ELSS investment journey with as little as ₹500, ensuring that you do not have to accumulate a sizeable investable corpus.
  • Systematic Investment Plan [SIP]. Investing through the SIP route allows you to invest in small amounts to create wealth over the long run and availing tax benefits. You can benefit from rupee cost averaging through the SIP route and the inherent volatility of the stock market.

What you need to weigh before investing in ELSS funds

A vital factor to consider is to examine the scheme’s performance over the past ten years before investing in the fund. In addition, you may also want to view the below aspects.

  • Long-term benefits. Since ELSS funds are the only type of mutual funds that invest in equities and provide tax benefits, several investors perceive these funds only for tax planning purposes. However, ELSS is ideal in helping you achieve your long-term goals in addition to saving tax. Hence, before you decide to invest in ELSS funds, you may want to create an investment plan that matches your ELSS investments with your goals.
  • Mode of investing. Some investors rush to invest in ELSS funds at the last minute in a rush to avail of tax benefits. That leaves them with investing the entire corpus as a lump sum. While the lump-sum mode of investing is one way to invest in mutual funds, it can get tricky, especially if the market is high. Ideally, if you link your long-term financial goals with ELSS investments, you may want to consider the SIP route to help average your buying cost per fund unit. 
  • Investment horizon. Given that ELSS funds offer the shortest lock-in period of three years compared to other traditional tax-saving instruments, most investors only stay invested for the mandatory timeframe. But, if you’re looking to build wealth through your ELSS investments, you may want to keep a long-term investment horizon beyond ten years to allow equity investments within the ELSS fund portfolio to stabilize.

Conclusion

ELSS funds offer the best of both tax savings and equity investments. Look for the right ELSS scheme from ICICI Direct to start investing today. Select suitable ELSS funds whose objectives align with your financial goals to allow you to reap the twin advantages of tax saving and potential capital appreciation.

Disclaimer

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.