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ELSS fund: Characteristics, comparison and advantages

[ecis2016.org] ELSS, or equity-linked savings schemes, are mutual funds where the asset allocation is mostly towards equity and equity-linked securities such as listed shares

An ELSS (equity-linked savings scheme) is a popular choice among investors who look to invest in mutual funds. In comparison to other popular investment options like Public Provident Fund, PPF and bank deposits, ELSS mutual funds offer the investor higher returns and more flexibility.

If you are planning to invest in mutual funds, you should know that ELSS funds, or equity-linked savings schemes, are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. You may claim a tax rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in taxes by investing in ELSS mutual funds. Their asset allocation is mostly (65% of the portfolio) allocated towards equity and equity-linked securities such as listed shares. ELSS generally has a three-year lock-in period, which is the least among all Section 80C investments.

ELSS funds: Characteristics

  • Under Section 80C, ELSS investments are eligible for tax deductions of up to Rs 1.5 lakhs per year.
  • ELSS funds have a three-year lock-in period and there are no provisions for early withdrawal.
  • There is no upper limit on ELSS investments, and the minimum investable amount varies among fund houses.
  • It is one of the few income investments that can outperform inflation.
  • ELSS funds provide you with the dual benefits of tax deductions and wealth building. 

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ELSS funds: Tax benefits

Under Section 80C of the Income Tax Act, 1961, ELSS mutual funds can be included among tax deductions of up to Rs 1.5 lakhs each year, saving you up to Rs 46,800 in taxes per year. However, ELSS redemption proceeds are not completely tax-free. Long-term capital gains of up to Rs 1,00,000 per year are tax-free, while gains beyond this amount are subject to a 10% long-term capital gains tax, plus applicable cess and surcharge. Dividends from your ELSS assets are added to your overall income and taxed at your marginal tax rate. Nevertheless, ELSS is the best tax-saving investment option under Section 80C of the Income Tax Act of 1961, despite the fact that the redemption proceeds are taxed.

ELSS fund: Factors to consider

The equity exposure of ELSS funds requires a longer investment horizon of at least five years, to mitigate market volatility in your portfolio. 

Tax-saving plans are only one of the benefits of investing in ELSS funds. However, there is a huge misconception that these funds promise guaranteed returns. The performance of ELSS funds is dependent on market conditions and synchronised with the respective equity indices to which they are attached.

The lock-in period for ELSS mutual funds is three years. This means that your investments are legally locked in for three years from the date of investment, and you cannot redeem them until the three years are up. You can switch to another fund or exit entirely before the lock-in period ends, if you choose not to stay invested in the same fund.

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ELSS fund: Mode of investment

When you invest in a fund through a SIP, you have the option of investing in it throughout the business cycle. When the markets are down, you buy more units, but when the markets are up, you buy fewer units. As a result, your fund unit purchase price averages out over time and comes out on the cheaper side. When the markets rise, you will benefit since you will be able to realise bigger capital gains on redemption. If you invest a lump sum, you will not be eligible for this benefit. 

ELSS fund vs other investments: Comparison

Scheme Lock-in period Risk
ELSS 3 years High
Fixed deposit Variable Low
NPS Till retirement Moderate
NSC 5 years Low
PFF 15 years Low

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How can I open an ELSS account?

To open an ELSS account, you must first open a free investment account with the fund firm of your choice. Following that, you must go through KYC verification, which requires you to add a photo in the prescribed format, your PAN, and a valid proof of address.

How can I choose the best ELSS?

To determine whether an ELSS is operating well, examine its historical returns, expense ratio, and financial statistics. A strong fund has a consistent track record and provides consistent returns. Market volatility has little effect on a top-performing fund. The fund’s returns must be backed up by its expense ratio. A greater expense ratio implies that the fund’s composition varies frequently, which is not a positive sign. You should consider ratios like Alpha, Beta, and Sharpe.

What is the optimal number of ELSS funds I should invest in?

To create an excellent portfolio, invest in two or three ELSS funds with related strategies.

How can I check my ELSS statement?

Obtain one from your mutual fund in which you have invested.

 

How can I get my ELSS investment proof?

You can get your investment proof from your advisor or mutual fund distributor, if you invested in an ELSS fund through them. Following receipt of your request, the advisor/distributor will notify the fund house, which will subsequently mail your account statement to your registered address.

Can I switch or change my ELSS?

A three-year lock-in period is required for ELSS regular plans investments. Before three years, you cannot redeem or switch your ELSS investment. This also applies to systematic investment plans (SIPs) that invest in ELSS funds. It is important to remember that moving funds means selling your existing fund units. Furthermore, switching funds is only permitted between funds offered by the same fund house. According to SEBI’s mandate, a fund firm cannot offer two separate fund plans within the same category. As a result, there is no way to swap ELSS funds, because the same fund firm cannot provide more than one ELSS fund plan. Alternatively, you can sell your present ELSS fund units and replace them with units in another ELSS fund.

 

What is the ELSS risk factor?

ELSS funds are equity-linked investment schemes, which means that they are exposed to stock market risk. However, you can reduce this risk by making a long-term investment in ELSS.

 

How can I redeem my ELSS after 3 years?

If you made your ELSS mutual fund investment in one lump sum, all of your units will be distributed on the same day.

 

When I redeem ELSS, do I get the whole amount?

You have the option of fully or partially redeeming your ELSS investment. You cannot redeem units that have not completed the three-year required lock-in period.

 

What is the difference between ELSS and mutual funds?

According to Section 80C of the Income Tax Act, an ELSS is a mutual fund that enables tax deductions of up to Rs 1.5 lakhs each year. The main distinction between an ELSS and ordinary mutual funds is that the latter does not provide tax advantages.

What is ELSS SIP?

ELSS is an investment vehicle whereas SIP is a method of investing in ELSS as well as any other mutual fund.

Can I invest in ELSS through SIP?

ELSS can be purchased like mutual funds. An Online Investment Services Account is the most convenient method. You have two options for investing: a flat sum or a SIP (systematic investment plan).

The most convenient way to invest in mutual funds is through a systematic investment plan, or SIP. It helps spread your investment. You may invest a small amount on a regular basis. SIPs can be scheduled weekly, monthly, quarterly, or bi-annually. You buy a set number of fund units equivalent to the ticket amount of your SIP with each SIP instalment. The amount invested in each SIP qualifies for deductions under Section 80C of the Income Tax Act of 1961. You can claim a maximum deduction of Rs 1.5 lakhs.

Can I stop SIP from ELSS?

It is possible to halt your SIP mutual fund investments and your equity linked savings programmes (ELSSs). You can seek assistance from a mutual fund advisor.

 

What is the difference between NPS and ELSS?

ELSS funds are perfect for short and long-term objectives. They also provide better returns than NPS, although they pose a greater risk than NPS. ELSS funds, unlike NPS, have a three-year lock-in period and are eligible for an 80C tax deduction.

NPS is better suited to long-term objectives (since it is locked-in till retirement) such as retirement preparation and provides consistent returns. NPS investments are eligible for tax deductions under Sections 80C and 80CCD.

 

What is the difference between PPF and ELSS?

Public Provident Fund (PPF) and the Equity-Linked Saving Scheme (ELSS) are two of the most popular tax-saving investment options. The Government of India limits and revises the returns offered by PPF regularly. The return potential of an ELSS is uncapped and has produced significantly better returns than a PPF, if the investment horizon exceeds five years.

PPF has a 15-year lock-in duration while ELSS has a three-year lock-in period. ELSS is the ideal Section 80C investment choice, because of its shorter lock-in period, higher return potential and convenience of investing.

 

How are ULIP and ELSS different?

An ELSS is a mutual fund that invests at least 65% of its portfolio in equity and equity-linked securities. ULIPs are financial products that mix insurance with investing. The ULIP premium is divided into two parts: investments and the actual premium for the policy. The gains are limited since only a fraction of your premium goes into investing.

 

FAQs

Can I redeem my ELSS before 3 years?

You cannot withdraw your ELSS before the end of the lock-in period. You can only redeem your ELSS assets in part or in full once the lock-in period has expired.

What is a lock-in period?

The lock-in period for an equity linked saving scheme is the time duration during which you must remain invested in the fund. During this time, you will be unable to withdraw your funds. In the case of the Equity Linked Savings Scheme, the lock-in period is for three years.

Source: https://ecis2016.org/.
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Debora Berti

Università degli Studi di Firenze, IT

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