A beginner’s guide to ELSS funds

August 24, 2021

A beginner’s guide to ELSS funds

Equity Linked Saving Schemes or ELSS, often referred to as tax-saver funds, are diversified mutual funds that primarily and principally invest in equities, but simultaneously allocate some proportion of their funds to the debt market, as well.

These funds are known as Tax Saving Mutual Funds, as they fall under Section 80C of the Income Tax Act, by using which, one can claim deductions up to Rs 1,50,000 a year. By investing in them, one can save a total of Rs 46,800 a year, in taxes.

However, there is a catch with these ELSS mutual funds. They come with a compulsory lock in period of three years, which is the shortest possible option among all others, provided under Section 80C.

Let us dive a little further into ELSS funds.

Features of an ELSS Mutual Fund:

  1. Dual benefit:

    ELSS funds are the only type of funds in the Indian market, that give you the dual benefit of a tax rebate and wealth appreciation. Under Section 80C of the Income Tax Act, 1961, one can save Rs 46,800 in a year, as tax deductions. Meanwhile, your funds are funnelled into the equity markets. Given a long enough timeline, they can earn handsome returns for the investor.

  2. Returns can beat inflation:

    One of the prime advantages of these tax-saving investments is that they have the capacity to beat the rate of inflation, unlike Fixed Deposits and funds in Savings Account, which deliver returns that consistently fail to cross the inflation rate. Being invested in ELSS funds for the long run can deliver great returns, which can beat the inflation rate by a long margin.

  3. Managed by financial experts:

    ELSS Mutual Funds are managed by fund managers who have an impeccable track record of managing portfolios and delivering returns, that trump benchmark performance. Their decisions are based on granular research and detailed analysis, and the pros and cons of every decision is carefully weighed before executing. All of these calculations go a long way in creating wealth for the investor.

  4. Shortest lock in period:

    Out of all the options that are presented under Section 80C, as a way of availing tax rebates, ELSS Mutual Funds have the shortest lock in period of three years. Investment in these schemes can help the investor preserve and appreciate his wealth over the course of a few years.

What should an investor look at before investing?

Too many times, investors mindlessly invest in these schemes without performing due diligence, in the belief that the scheme only serves as an instrument for availing tax rebates. However, ELSS Mutual Funds can help multiply one’s wealth, if the funds are invested in a fund with an impressive historic performance.

  1. Fund history:

    Investors must be careful to choose fund houses that have a good track record, when it comes to delivering strong returns. Those interested in pooling their wealth in these schemes, must invest with fund houses that have performed well over the last 10 years. Investors must also check the performance of the scheme vis-a-vis the performance of the benchmark index.

  2. Expense ratios:

    Investors must carefully ascertain the expense ratio of these Tax Saving Mutual Funds. The expense ratio depicts the costs that are allocated towards managing your funds. These costs are pocketed by the fund managers. Therefore, if two ELSS schemes have consistently similar performances over the previous years, then the investor should look at the expense ratio and go with a fund that charges a lower fee.

    Risks to keep an eye on:

    Before investing, investors must understand that two overarching risks go with investing in ELSS Mutual Funds. They are:

    1. No breaking of lock in period:

      Once invested, the sum will remain invested in the ELSS Mutual Fund for a period of three years, and not a day less. The period of three years is the shortest possible option provided under section 80C of the Income Tax Act. An investor will not be able to withdraw his sum before the prescribed period of three years.

    2. Funds are invested in the equity markets:

      As mentioned earlier, a majority of the funds are invested in the equity segment of the markets. This means that they are subject to market fluctuations and volatility. Meanwhile, markets, especially equity markets, swing from the bullish to bearish territory and back under the influence of domestic and global macro-economic factors. Market volatility is also determined by the flow of capital across different channels, throughout the world.

Bottom line:

Investors can choose to invest in a Tax Saving Mutual Fund of their choice, by visiting the ICICI Bank’s website. ICICI Bank brings to its customers, the best of ELSS funds that are designed to preserve investor wealth and meet their risk appetite. These Mutual Funds give investors a reliable opportunity for long-term capital growth and protection. One also has the option of investing through a SIP and can start at as low as Rs 500, monthly.

Terms and Conditions apply.

 

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