Equity-linked saving scheme (ELSS) is a popular investment option to increase wealth and save money. The investors get to enjoy the tax benefits and earn high returns. ELSS is a great opportunity for investors to grow their hard-earned money. But before investing in the ELSS funds, you must know how to invest smartly while considering the essential factors.
Here, we will learn more about Equity Linked Savings Schemes for tax saving and stock market investment.
What is ELSS?
Investors highly prefer equity-linked savings schemes as the money gets into various market instruments. The major portion of your money is invested into equity or other related tolls. The other portion is invested in gold, debt funds, etc. ELSS offers tax exemption under section 80C of the Income Tax Act. Every year, at the end you receive the tax benefits of Rs. 1.5 lacs on investment. The features of ELSS include:
- ELSS is a high-risk investment as a major part of the investment goes into equity funds. Only a small portion goes for portfolio diversification.
- You get the tax exemption under section 80C and get a rebate of Rs. 1.5 lacs yearly.
- ELSS has a 3-year lock-in period and you are not allowed to exit before maturity. Meanwhile, ELSS mutual funds have the shortest lock-in period. The other ELSS lock-in period is 5 years.
- You can start with SIP investment. A lump sum investment option is avail in ELSS however, there can be a minimum amount as per the asset of an asset management company or fund house policy.
5 Factors to Consider Before Investing
Here are the important factors to consider before investing in ELSS. You will also learn some tips on how to invest in ELSS.
1. Asset Composition
ELSS fund managers allocate a minimum of 80% of funds to equity and equity-related instruments. The other portion is invested in fixed-income or money market schemes. The kind of stock to invest is chosen by the fund managers as per the level of risk involved and your financial objectives. ELSS is a high-risk investment and requires a high amount to invest while those with medium risk require a comparatively lesser investment amount. So, before investing in ELSS, analyze where you wish to invest and make a proper investment strategy with the fund manager.
2. Lock-In Period
Many investments provide tax benefits under section 80C of income tax, 1961. These investment options are chrome with a lock-in period. Similarly, ELSS has a lock-in period of a minimum of 3 years. It is usually the lowest as compared to other investments.
ELSS funds investment does not allow you to redeem the units before completing the lock-in period.
On the other hand, the locking period for other investment options under this section ranges from 5 years to 15 years. Hence, ELSS has the lowest lock-in period of 3 years and allows you to generate compounded returns.
3. Invest in ELSS Funds via SIP
SIP is an investment option where you can invest a small amount in Mutual funds regularly. You get the benefits from Rupee Cost Averaging to lower the average cost of purchase of Mutual funds. SIP is considered the best option to start investment because it is beneficial during the market downfall. When the market falls, you can purchase more units to lower the average cost of purchase. It further reduces the risks of investing in a lump sum during the peak time of the market.
ELSS has a lock-in period on every purchase. If you invest with SIP monthly, your investment every month will have a 3-year lock-in period starting from that month when you have invested.
For example:
- SIP 1st Installment – Rs. 10,000 on 15th February 2025 with lock-in period up to 15th February 2028
- SIP 2nd Installment – Rs. 10,000 on 15th March 2025 with lock-in period up to 15th March 2028
- SIP 3rd Installment – Rs. 10,000 on 15th April 2025 with lock in period up to 15th April 2028 and so on…
4. Don’t Add so Many ELSS Funds to Your Portfolio
While investing in tax saving schemes, you must also take care of your investment portfolio and the effect of your investment on your portfolio. Investors usually buy units from a new scheme from a different AMC every year. Various investors don’t worry about the risks involved and only focus on saving tax. After a few years, this results in having multiple ELSS in their portfolio. If you don’t plan your investment carefully, you are likely to end up in multiple ELSS funds within one category, creating over-exposure.
Hence, as a smart investor, you must take care of the type of ELSS funds you’re buying every year to diversify your portfolio.
5. Risk Involved
Since ELSS funds are major equity-related investments, the risks involved are the same as stock investments. However, all the ELSS are not high-risk schemes. Fund managers provide the ELSS funds with diverse risk levels as per the needs of the investors. When investing in ELSS, you must carefully analyze the risk involved with high returns. Make sure you choose the investment as per your financial goals and investment plans.
Conclusion
ELSS is an equity mutual fund offering the opportunities to build wealth and save tax. If you are looking for an investment option to save tax while not losing capital growth, ELSS is a good option. The lower lock-in period makes this investment option even more attractive. However, you must have a significant risk tolerance. The ELSS portfolio mainly contains equity-related instruments and is highly volatile. It’s better to invest in ELSS through SIP for more growth, good returns, and safe investment.
FAQs
What is the exit load for ELSS funds?
Ans. ELSS funds do not have any exit load, however, you must read the investment document carefully to know more about it.
How do equity-linked saving schemes work?
Ans. ELSS mutual funds are equity funds and the major portion goes into equity or equity-linked investment tools. It offers tax benefits under section 80C of the Income Tax Act, of 1961.
What is the best ELSS fund to invest in?
Ans. There are various ELSS funds based on the investor’s needs and risk tolerance. As they are market-linked, the performance depends on the market trends and investment strategies of the fund managers. So, you must compare the different ELSS funds and then choose which one suits you the most.
What are the main differences between ELSS and other mutual funds?
Ans. The major difference is that ELSS funds offer tax benefits under section 80C and have a 3-year lock-in period.
How to invest in ELSS?
Ans. It’s better to start investing in ELSS via AMC, brokers, or other investment platforms. Open an account and complete KYC as per SEBI.
