Equity Linked Savings Scheme (ELSS) is known for its dual benefits of tax saving and long-term potential returns through equities. You might have come across several blogs that compare the features of ELSS tax benefits with that of other tax-saving instruments. But, how do these funds fare when compared to other mutual funds? And what are the significant benefits to look for while investing in these funds?
Let’s find answers to these questions by analysing each of its advantages.
Say you wanted to invest in stocks. It is said that seeking professional financial advice can help you make informed investment decisions. But once your portfolio is ready, you need to track, manage and rebalance it over a period.
What if you could invest in stocks as a pre-designed package? Also, a professional fund manager carefully selects each of the underlying assets. You also need not track your portfolio or rebalance the underlying assets. Yes, all this can be possible with ELSS mutual funds.
This is also a crucial aspect when choosing schemes in ELSS. The one with an experienced fund manager having a track record of churning returns through assets over time can be better. So, if you are only looking at the ELSS mutual funds tax benefit, there is much more these investments can offer.
In investments like PPFs, your entire account with your investments during the tenure of 15 years matures at once. Once mature, you can either redeem your total amount or extend or renew the fund. However, ELSS, with a maturity period of three years, follows the FIFO norm for maturity.
Therefore, each of your investments needs to complete its maturity period separately. This applies to Systematic Investment Plans (SIP) and lump sum investments. The number of units bought first would mature first. Moreover, you need not take action after the maturity of units, i.e. it is not mandatory to redeem or renew these investments. You can stay invested for as long as you want and redeem it to match your goals.
Let’s understand this with an example.
Say you started a SIP in ELSS in April 2018 and have continued your investments since then. So, in April 2022, your SIP units purchased till April 2019 would have completed their lock-in period. But the ones purchased after April 2019 are still locked-in. However, you can let your matured units stay invested with the others and gain through compounding and cost averaging.
This brings us to another benefit, cost-averaging.
Equity investments are more volatile in the short and long run. For example, if you see a line chart showing the five-year performance of a Nifty50 index, you might see small short-term diversions forming a long-term upward momentum.
You can benefit from these short-term plunges. As the stock prices decline, you can buy more fund units. Also, on purchasing these units, your buy price will average. This can be measured in terms of the mutual fund's Net Asset Value or NAV. Similarly, when the price of stocks rises, the value of your units will appreciate to give you better returns. This process is called cost averaging and is possible when you invest in equity mutual funds through regular SIPs.
ELSS invests in equities, and there are two things popular about them. One is the volatility, and the other is the potential for high returns. While the former can be achieved with regular SIPs, the latter can be achieved if you stay invested in them long-term.
Check the performance, underlying stock funds management and other aspects of ELSS funds through the Fi Money app. Refer to our insights and research to compare different schemes and choose the suitable scheme for your tax saving goal.
Long-term capital gains from ELSS are tax-free up to ₹1 Lakh. So, if you have made a profit over ₹1 lakh, then they will be taxed for long-term capital gains at the rate of 10 power cents. Even while calculating the tax liability, you can benefit by indexation.
So, you invested in ELSS and saved taxes. Now, what would you do with these investments? The underlying assets in ELSS are equities, famous for their potential long-term gains. So, why not make the most of it by connecting it to a long-term goal? These goals can be retirement planning, higher education or getting married and other goals. Isn’t it a Buy One Get One or BOGO offer on your investment? So, combining the ELSS mutual funds tax benefit with planning for your other financial goal can help you realise its potential.
One can invest everything at once in a lump sum or instalments with SIP. Now, what sounds better to you? Is it investing ₹1.5 lakh in one go or around ₹12,500 per month with SIP? Based on your comfort, you are free to make investments in ELSS accordingly.
Also, if you wish to make even smaller investments, you can even have a daily SIP option. This is available with the daily deeds feature in the Fi Money app. You can deduct an amount, say ₹500, every day from your bank account and invest in ELSS. This can be an alternative way of reaching your ₹1.5 lakhs tax saving target.
Following the plan rigorously each month can grow simpler after establishing a savings habit. While investing in ELSS, you can use your savings for other financial goals. You can park them in Jars, a saving feature offered by the Fi Money app. Here, you can save through deposits and track your journey towards your goals.
Say you have a portfolio largely consisting of assets like debt and goals. You might want to enter into equity investments but wonder which stock to add. No worries, the ELSS funds, like other equity-based mutual funds, can solve this problem with a pre-designed pool of stocks. This can help you diversify your portfolio by adding equity investments.
We all like to get the most out of our investments. So, what can be better than diversification, affordability, professional management, goal planning, cost averaging and higher potential returns? You also get a BOGO offer of combining a long-term financial goal with your tax-saving goal. Yes, all of these benefits are available through a single scheme. This can make ELSS an essential bit of a kit for any portfolio.
Learn more about investing options through this short video: https://www.youtube.com/shorts/GkG7CfRfkV8
Based on the underlying assets, ELSS is an equity mutual fund. These funds have around 80 per cent of underlying assets as equities. These funds can help you save taxes up to ₹1.5 lakhs under section 80C of the income tax act. Also, like other mutual funds, you can invest in ELSS through SIP or lump sum. Since the underlying assets are equities, the fund can be more suitable for those having a higher risk appetite.
Do you want to invest in ELSS? The Fi money app offers specialised insights and professional research to help you select mutual funds.
The ELSS tax benefit is possible after a lock-in period of 3 years. The lock-in period applies to all of your ELSS investments. When it comes to SIP investing, this gets challenging. Every monthly investment has a three-year lock-in term. This implies that after three years, or 36 months, only your first monthly SIP would have fully satisfied the lock-in term. The maturity period in mutual funds works as per the FIFO rule.
ELSS is a type of mutual fund, whereas SIP is a method of investing in a type of mutual fund. So, ELSS is a type while SIP is a method.
Comparing ELSS with SIP is like comparing types with methods. Therefore, it is invalid to develop an ELSS vs SIP debate.
You can make a SIP or lump sum investment to get the ELSS tax benefit. So a better debate can be lump sum vs SIP in ELSS. SIP in ELSS can have advantages such as flexibility, convenience, affordability and cost averaging ability. On the other hand, lump sum investments can have benefits like bulk maturity post-lock-in. Therefore, you can choose which method you wish to invest in ELSS.
Yes, investing in ELSS funds is a great way to save on your taxes and aim for steady growth of your wealth.
ELSS and PPF are both popular investment options in India.ELSS invests in equity shares and has a 3-year lock-in period with tax benefits under Section 80C.PPF is a government-backed scheme that provides fixed returns and has a lock-in period of 15 years with tax benefits under Section 80C.Which option is better depends on your investment goals, risk appetite, and financial situation.