ELSS or Equity Linked Savings Fund invests in the stock market. It comes with a lock-in period of 3 years which is the shortest among all tax saving options. Fund managers usually pick securities of companies that have promising growth potential. You can enjoy tax benefits and higher return potential as well. This combination can lead to good post-tax returns.
Given these benefits and figures, ELSS happens to be the most efficient way to grow wealth. But it is important to know a few things before investing. Have a look.
1. Tax Implications
You can claim a tax rebate by investing in ELSS. The deduction is up to ₹1.5 lakhs under the Section 80C of Income Tax Act, 1961. This can help you save up to ₹46, 800 annually. ELSS tax benefit can be claimed when you file the returns for a given year. However, your income will be taxable at 10% if the long-term capital gain is worth ₹1 lakh, as per the Union Budget 2020.
2. Equity Market Exposure
ELSS could be your entry point to the world of stock markets. You can start with an SIP with as little as ₹500. Investors do not have to wait for the right market timing. You can also benefit from a diversified portfolio that is managed by a professional. Enjoy the growth potential of equity stocks if you can park your funds for 3 years without hassle.
3. Stay Invested
The ELSS comes with short lock-in tenure. But it is a good idea not to withdraw early; especially if the funds are performing well. Mutual funds of India have always done better when held for a longer period, preferably 7-10 years. Therefore, extend the period as much as possible. This can help you build corpus to fulfil big goals and aspirations.
4. Moderately Risky
ELSS might not be suitable for risk-averse or budding investors. This is because it is likely to see fluctuations in NAV. But if you have a moderately high-risk appetite and are seeking capital appreciation, ELSS could be useful. You have to stay invested for a longer timeline. It can keep you protected against volatility which the funds might face in short term.
5. Investment through SIP
This is the ideal way to invest for beginners and pro-investors. Regular investment through small amounts in equities can bring about better compounding advantages. In fact, you can buy more stocks due to the rupee cost advantage. It can also help develop financial discipline for both salaried and self-employed individuals. Good savings and investment habits will allow you to weather all periods of crises. All mutual funds are subjected to market risks. Similarly, ELSS also comes with its share of risks. Therefore, it is always recommended to read the terms and conditions beforehand. Also important is to compare fund performance with its benchmark and competitors to look for consistency. Consider taking a look at the history of the financial company and the fund manager.
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