If there is one kind of mutual fund that is eligible for tax deductions – isn’t that a great deal? Now – you may be wondering why you need to invest in these funds, too – but honestly, it is a great deal of investment for you. You will have to have a percent of investment in every kind of investment vehicle. Here, we are going to talk about ELSS Funds and their features of it, so you can start investing.

What are ELSS Funds?

ELSS is a diversified, open-ended Equity Mutual Fund that provides greater returns while also providing significant tax benefits. The tax exemptions are provided in accordance with Section 80C of the Income Tax Act. The majority of the funds are invested in equity funds. The lock-in period or tenure for these funds is three years, after which investors can exit the program by selling it.

Characteristics

The ELSS funds carry a set of features that you will be carrying along when you invest in them, and they are:

Lock-in period

There is no maximum investment tenure. There is, however, a three-year lock-in period that you must consider. During these three years, you are not permitted to withdraw your money.

Investment Options

You can invest in ELSS funds in two ways: as a flat payment or through a Systematic Investment Plan, SIP. The latter is appropriate for those looking to invest as little as INR 100-500. (depending on the fund house).

Diversification

After careful deliberation, a minimum of 80% of your total investment is put in equities and equity-oriented shares, with the remaining 20% placed in debt and hybrid funds. This diversification helps to limit the risks of equity investing through the best ELSS funds.

Management

ELSS investments, like all mutual funds, are managed by skilled fund managers with years of expertise. Such managers are well-versed in the past performance of the funds, guaranteeing that your investment is in good hands.

Tax-Saving

It should be noted that ELSS investments qualify for tax exemption under Section 80 C of the Income Tax Act of 1961. It indicates that the amount you invest in ELSS is tax deductible as long as it is less than INR 1.5 lakh. Section 80 C allows you to deduct up to INR 1.5 lakh in investments per fiscal year. If you haven’t reached this limit yet, investing in ELSS can help you reduce your tax liability.

To put it another way – if you invest INR 1 lakh in other instruments listed under Section 80 C (PPF, NPS, life insurance, and so on) in a given fiscal year, you will still have an investable excess of INR 50,000. Investing this sum in an ELSS fund will help you reduce your tax liability even further.

Who are these Funds the Most Suitable for?

ELSS funds are appropriate for all investors seeking a way to create income while saving taxes. They are especially advised for people who do not earn a lot of money and consequently have a low-risk tolerance and appetite.

Investing in ELSS funds is not restricted by age. As a result, newly hired professionals might invest their hard-earned money in these schemes.

ELSS funds are appropriate for those wishing to diversify their investments and add another choice to their portfolio. You can even boost your investment portfolio by investing in the top three or four ELSS funds.

SIP or Lumpsum?

If you do not want to take on more risk, investing through a SIP is a good option. When you invest through a SIP, you have the option of investing in a fund throughout the business cycle. This lets you reap the perks of purchasing fund units throughout market cycles. When the markets are down – you buy more units, but when the markets are up – you buy fewer units. 

As a result, the cost of purchasing fund units averages out over time and ends up being on the low side. When the markets rise, you will benefit from this since you will be able to realize greater capital gains on redemption. When you invest a lump sum – you will not be eligible for this benefit.

Investing in a lump sum is not recommended unless the markets are in a bearish trend, you are willing to assume higher risk levels, and you have a longer investing horizon. You miss out on the ability to buy fund units at different stages of the business cycle, which needs you to stay invested for more than 5-7 years to realize good returns.

Benefits of ELSS Funds

ELSS funds are the most tax-efficient way to invest. The amount invested in an ELSS fund can be deducted under Income Tax Act Section 80C. An ELSS fund has a substantially shorter lock-in duration than traditional tax-saving choices such as Public Provident Fund (PPF), National Savings Certificate (NSC), and bank fixed deposits. PPF investments have a lock-in length of 15 years, NSC investments have a lock-in period of 6 years, and bank fixed deposits, which are eligible for tax deduction under section 80C of the Income Tax Act, have a lock-in time of 5 years.

Thus, as compared to all other tax-advantaged investment choices, ELSS has the shortest lock-in time. SIP investments are another option. ELSS funds provide the ideal combination of the long-term horizon and SIP investment. 

As ELSS funds are equity investments, they will provide strong long-term returns. Long-term investors will profit from the force of compounding, which will result in noticeably larger dividends in subsequent years.

Ensure you have the following in line –

• The investor should confirm that the fund has long-term performance in order to receive guaranteed returns.

• Other aspects of the fund must be investigated, such as the fund portfolio, volatility of the fund, expense ratio of the fund, and so on.

Final Takeaway

Investing in different investment vehicles is essential for every investor, and this can expand your portfolio. Your investments in ELSS funds can give you a big heap of benefits. Moreover, this is the only mutual fund that has a tax benefit.