In matters of savings and investments, an individual’s first priority is usually investments designed to bring about tax savings. While there are various tax savings options available out there under section 80C of the Income Tax Act, equity-linked savings schemes (ELSS) have emerged as one of the most popular options. ELSS is a tax-saving mutual fund with a three-year lock-in period, where investments are made in equity-related instruments.
So what makes ELSS the favoured choice? In the following section we will discuss some of the main advantages of investing in an ELSS mutual fund:
- Has Short Lock-in period
In comparison to other tax savings instruments like the National Savings Certificate (NSC), tax savings bank deposit or Public Provident Fund (PPF), the lock-in period is much lower for an ELSS fund. While NSC, tax-saving FD and PPF require a lock-in timeframe of 6 years, 5 years and 15 years respectively, an ELSS fund has a lock-in period of only 3 years. In comparison, ELSS funds are far more convenient as you have faster access to the funds for re-investment or spending purposes as these investments can be made and redeemed online.
- Yields High return on investment (ROI)
As ELSS is an investment which is made in the equity markets, you can expect higher returns in comparison to many other tax-saving investment options, from the perspective of a long-term investor. Thus, not only do they help save tax, but they also enable you to make a bigger profit on your investment. It is however recommended that investments in an ELSS fund be made over the medium to long term in order to derive maximum benefits from your investment. While fixed deposits and PPF provide returns in the range of around 8%, ELSS schemes have historically generated returns of 12% and higher over a 10-year period.
- Offers Tax Benefits
ELSS funds qualify for tax exemptions under 80C of the IT Act where investments of up to Rs.150,000 can be claimed as tax deduction in each financial year. Furthermore all capital gains earned through ELSS funds are tax-free i.e. there is no tax imposed on the maturity amount or the earnings accrued through ELSS investments. This is why ELSS is a much-preferred savings option, and not only from the tax-savings perspective.
- Inculcates Financial Discipline Through SIP
Mutual funds generally offer a systematic investment plan (SIP) facility, wherein, you can invest a fixed amount every month, just as you would in case of a recurring deposit. ELSS funds also provide this facility, where your earnings can be deployed into your ELSS fund periodically (weekly/monthly). This proves to be a great advantage as it reduces the strain of having to invest a lump sum amount at a time, thus reducing the strain on your monthly budget.
- Protects from Inflation
ELSS funds also help earn returns that are able to beat inflation. While bonds and fixed deposits might offer returns that may be in line with the pace of inflation over a period of time, in reality, the real returns are quite low. Since ELSS funds are equity-based and returns are tax-free, they provide higher gains as compared to other investment options, which are in line with the increase in inflation.
- Is a Long-Term investment option
There is a general misconception that in case of ELSS, funds need to be withdrawn or re-invested elsewhere, once the lock-in period has been crossed. This is not the case with ELSS funds, there is no need to do so if the fund is performing well. ELSS funds provide investors with the choice of continuing to stay invested beyond the lock-in period, if they desire. If the ELSS fund is a well-diversified scheme, it is in fact advised that it be considered more as a long-term investment.
- Is Affected Minimally by Market Volatility
Traditionally, ELSS mutual funds have shown themselves to be considerably less volatile as compared to other equity investments. Thus many experts suggest that investors make ELSS investments in order to prevent being affected by the volatility of traditional stock market investments.
Conclusion
Due to the above as well as other benefits of ELSS funds, financial planners recommend that they be considered for reasons over and above the tax-savings benefits they provide. Though it is always suggested that one should ideally have a diversified portfolio, with investments made across the entire gamut of tax-savings and profit-maximisation schemes, one should definitely include ELSS funds in their investment portfolio. This is because the risks they come with given that they are equity-based schemes are more than compensated for by their numerous advantages.