In the past decade or so, ELSS, commonly known as Equity Linked Savings Schemes have caught become a popular mode of investment. ELSS mutual funds dedicate at least 80% of their assets towards equities and equity-related instruments. Owing to their rising popularity, individuals are often curious about the advantages and disadvantages of investing in ELSS funds. Read on to know more.
Advantages of investing in mutual fund tax saver
Following are a few ELSS benefits:
- To save tax
ELSS mutual funds are popularly claimed as tax saver mutual funds as these funds are eligible for a tax deduction of up to Rs 1.5 lakhs u/s 80C of the IT Act, 1961. As an investor, you can save tax of up to Rs 46,800 by investing in these tax-saving mutual funds. Note that, ELSS mutual funds are the only type of mutual funds that offer tax-saving attributes to its investors.
- Lowest lock-in period
ELSS mutual funds have the lowest lock-in period of just three years as compared to other Section 80C investments. Public Provident Fund (PPF), bank fixed deposits (FD), National Savings Certificate (NSC), Senior Citizens Savings Scheme (SCSS) have a lock-in period of 15 years, 5 years, 5 years, and 5 years respectively.
- To earn significant returns
ELSS funds have historically offered investors with double-digit returns in the past when invested for a long duration. This is because ELSS funds invest most of their assets in equities and equity-related instruments. ELSS funds provide an annual average returns of whopping 10 to 15% when invested for a prolonged duration.
- Ease of investment
An investor can invest in ELSS through a Systematic Investment Plan (SIP) or lumpsum mode. They can easily invest in ELSS from the comfort of their home.
ELSS funds are closely regulated and monitored by the Indian markets’ regulator – SEBI (Securities and Exchange Board of India). Thus these funds are entirely transparent and safe to use.
Disadvantages of investing in ELSS funds
ELSS funds have their own set of drawbacks. Following are some of the cons of investing in ELSS:
- Limited tax benefits
The Section 80C tax deduction of Rs 1.5 lac is a cumulative deduction for all the investments made against specific tax-saving investments for a particular financial year. This limit includes all the Section 80C investments. Therefore, if an individual has already reached the limit of investing Rs 1.5 lac under these tax-saving investments, tax deductions on ELSS cannot be claimed.
ELSS funds are an excellent choice for investors looking to earn significant returns on their mutual fund investment by exposure to equities. ELSS funds are known to offer dual benefits of tax saving and capital appreciation attributes to investors. However, one should not invest in ELSS with the sole purpose of saving tax. Your mutual fund investments must align with your financial goals, risk appetite, and investment horizon. Happy investing!