Tax Savings Fund (ELSS)

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Tax Savings Fund ( ELSS )

ELSS Mutual Funds

Investors look for investment opportunities that can help them generate wealth, get regular returns, and / or save taxes. While there are numerous investment schemes available in the market, most of them offer returns that are taxed according to the Income Tax rules. This is where ELSS funds step in. Equity Linked Savings Scheme or ELSS Funds are tax-saving equity mutual funds ,which offer tax rebate under section 80C and are taxed as per the capital gain taxation applicable for equity mutual funds, hence are highly tax efficient.

What are ELSS Mutual Funds ?

Equity-Linked Saving Scheme (ELSS) or tax-saving funds, falls under the diversified category of mutual funds with minimum exposure of 65% in equity and equity related instruments and the rest of the amount can be invested in debt related instruments. ELSS provides the dual benefit of capital appreciation and tax-savings simultaneously. These funds shortest lock-in period among all 80C option of three years

Who should invest in ELSS Mutual Funds ?

Any individual or HUF can invest in ELSS. However, these funds are best suited for long term investor who are seeking capital appreciation along with tax saving. Young investors in the initial years of their career can start investment in ELSS with a long-term horizon. These investors having time on their side can build a healthy corpus through power of compounding.

Advantages of ELSS Mutual Funds

Shortest lock-in: The lock-in period of three years is the shortest of all Section 80C avenues. This gives comfort of liquidity to the investors with an option to withdraw the money after the minimum lock in period. However, it is advisable that one remains invested in ELSS for long-term.

SIP option: ELSS inculcates discipline of investing in equities as one has an option to invest systematically/regularly through SIP. It is always advisable to invest in equities in a staggered manner to get the benefit of rupee-cost averaging. Thus one should start with ELSS Investments through SIP.

Lock in period: In ELSS ensures that the person stays invested in equities for a long term thus reaping the benefit of compounding.

Potential to offer much higher returns: ELSS mutual funds have the potential to offer much higher returns than other tax saving instruments such as PPF, NPS and Bank FD.

Capital gain: Is taxed at par with the equity funds, with 1^st 1 lac being income tax free and the differential is taxed at 10% in case of long term capital gain.

No Capping: There is no capping on investment, although benefit under section 80 C can only be taken on 1.5 lacs as per current rules.

How to evaluate the Best ELSS Mutual Funds

The ELSS funds work as an equity mutual funds for an investor with a 3 yrs lock in period. The Asset allocation and portfolio details are the key for the ELSS performance in the future.

Ways to Invest in ELSS Funds

Growth option: When the investor opt for the growth option, he will get the gains only at the time of redemption. This method enables the investor to realize the real power of compounding over a period of time. The investor in this case should be cautious as the returns are subject to market risk.
Dividend Payout option: When the investor opt for the Dividend payout option he gets dividend payments as and when it is declared under the scheme. The dividend is declared only when there are excessive distributable profits
Dividend Reinvestments option: When the investor opt for the Dividend Reinvest option. the investor mandates the fund house to reinvest the dividend declared under the SME scheme. This increases the no of units held by the investors.