What is an ELSS fund – meaning, benefits, features, and more

Picture a delicious and healthy smoothie. An assortment of fruits, veggies, and nuts, this versatile drink can give you energy, nutrition, and satiety minus the unwanted fat and calories. This is exactly how ELSS funds work. They provide you with several benefits such as diversification, tax benefits, and equity exposure minus the long lock-in periods. Sounds interesting? Keep reading to find out what is an ELSS fund.

Understanding ELSS funds

Short for Equity Linked Savings Scheme, ELSS is a type of mutual fund that primarily focuses on equities and equity-related instruments. According to the Securities and Exchange Board of India (SEBI), ELSS funds are required to invest a minimum of 80% of their total assets in equities and equity-related securities.

ELSS funds are often referred to as tax-saving equity funds because they offer tax benefits under Section 80C of the Income Tax Act, 1961.

Check out some features of ELSS that make them versatile and unique.

Features of ELSS mutual funds  

• Equity funds: ELSS funds are categorised as equity mutual funds as they primarily invest in equity and equity-related securities.
• Lock-in period: These funds have a lock-in period of three years from the date of investment, which is the shortest among all tax-saving instruments under Section 80C. Also, there is no maximum investment term.
• Diversification: These equity fundscan offer a well-diversified portfolio of stocks varying across market capitalisations, sectors, and themes.
• Multiple investment methods: You can invest in ELSS in a lump sum or through a Systematic Investment Plan (SIP), which lets you invest in small but regular sums monthly, quarterly, annually, etc. 

What are the tax benefits offered by ELSS mutual funds?

Tax savings are one of the primary appeals of ELSS funds. ELSS is the only mutual fund scheme that qualifies for a tax deduction under Section 80C. As per this section, investments made in ELSS are eligible for a tax deduction of up to Rs 1.5 lakh in a financial year.

In addition to this, since ELSS funds have a mandatory lock-in period of three years, they automatically qualify for long-term capital gains tax, which is typically lower and more attractive than short-term capital gains tax. Long-term gains up to Rs 1 lakh are exempt from tax in a financial year and profits exceeding Rs 1 lakh are taxed at 10%.

Investing dilemma? The following section can help you make up your mind.

Why should you invest in ELSS tax-saving mutual funds? 

• Tax savings:The tax deduction is the most obvious benefit from ELSS. Since no other mutual fund scheme offers tax savings under Section 80C, you can add ELSS to your portfolio to enjoy additional tax benefits.
• Diversified equity portfolio:Being equity mutual funds, ELSS funds can offer you exposure to a diversified equity market that can be suitable for long-term financial goals.
• Low investment amounts:You can start investing in ELSS with a minimum investment of Rs 500. This makes it easy to accommodate these funds in your monthly budget.

As with all investment decisions, it is important to consider all variables beforehand. We recommend taking a look at certain factors involved with ELSS investing.

Factors to consider before investing in ELSS Funds

ELSS funds primarily invest in equities, which can be subject to market fluctuations and higher volatility. Moreover, even though these funds have a lock-in period of only three years, they are suitable for long-term goals as equity markets can be susceptible to fluctuations in the short term.

Keep your risk appetite and goals in mind when selecting these funds.

SIP or Lump sum – Is there a better route?

The decision primarily depends on your financial goals and investment preferences. SIPs are suitable if you have a regular income and want to invest a fixed amount periodically without a substantial initial investment. SIPs also average out the investment cost over time by allowing you to buy more units when prices are lower and fewer units when prices are higher.

A lump sum investment may be helpful if you have a substantial amount of money at your disposal, such as an inheritance, bonus, or investment return.

Conclusion

ELSS funds not only help you save tax but can also be a suitable investment option for long-term goals. However, it is important to assess your risk appetite and goals and see if they make a good match for you.

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