Everything you need to know before investing in ELSS funds

Among the distinct financial options available in the market to save tax, ELSS (equity-linked savings scheme) is one of the most popular and promising options available. ELSS is a diversified tax-saving mutual fund that majorly invests a huge chunk in equity and equity-linked securities. This is a financial product that provides you with the convenience to get tax benefits along with higher returns by exposing you to the potential of equity markets. ELSS investing makes you qualify to get a tax deduction as per Section 80C of up to Rs 1.50 lakh. Here are some of the important things you must be aware of before investing in ELSS mutual funds.

• An excellent way to get equity market exposure

As compared to investing directly in stock markets, ELSS mutual funds are the best way to get equity exposure. Alongside expertise management, you get the advantage of a well-diversified portfolio at an affordable investment. Note that you can initiate an SIP (systematic investment plan) investment of as less as Rs 500 and remain stress-free from market timing. 

One major thing you must be aware of is that an ELSS mutual fund comes with a three-year lock-in. So, if you block your surplus investible for such periods, ELSS mutual fund can act as a prudent medium to enjoy the equity stock potential. 

• Lock-in investment tenure

In comparison to various tax saving instruments offered as per Section 80C, an ELSS fund offers the shortest lock-in of just three years. This means you cannot liquidate your investment before you complete three years. Comparatively, PPF (public provident fund) has a lock-in of 15 years, and NSC (national savings certificate) and tax-saving fixed deposit have a lock-in of five years. Besides this, you must not perceive ELSS mutual funds as a short-term investment avenue. ELSS is an equity investment and requires you to have a long-term investment timeframe of at least five to seven years to make the most out of your investment. 

• The expectation of high returns

Being an equity-linked investment, ELSS mutual funds have a high potential to yield higher returns than other investment options. However, you must not be unrealistic about your investment returns. Remember, there are zero assured returns in equities. Equity fund performance tends to vary throughout distinct time frames. So, only if you remain invested for a higher investment horizon, you can hope to generate higher returns. 

• Tax exemption

As mentioned above, as per Section 80C, you can get a tax deduction of as high as Rs 1.50 lakh in a financial year on ELSS. For example, if your taxable annual income is Rs 8.5 lakh and you made an investment of Rs 1.50 lakh in ELSS, then your taxable income would be reduced to Rs 7 lakh (Rs 8.5 lakh – 1.50 lakh). 

Ending note

A prudent way to approach ELSS is to conduct a detailed strategy at the beginning of a financial year. So, you must avoid postponing your tax-saving investments until the end of the year. A well-planned and goal-based approach can assist you to choose the correct mutual fund as per your requirement.