What are ELSS Funds? Features, Tax Benefits & How To Invest?

ELSS is an equity scheme that helps in creating wealth over the long term with several tax benefits under the Income Tax Act of 1961. ELSS Funds full form is Equity Linked Savings Scheme and it has a three-year lock-in period. In this post, we will check out what an ELSS Fund is in detail, check out the tax benefits, and the different options to invest in this fund. ELSS is a popular tax-saving mutual fund option among Indian investors. These are highly popular due to the fact that they possess a lower lock-in period of just 3 years, have the potential of delivering better returns compared to various other options, and provide tax benefits too. Generally, over 80% of the ELSS Fund is an equity-oriented option and is for investors with long-term investment goals. Being an investor, you can select from the ‘growth’ or ‘dividend’ plans before you plan your investment strategy with the ELSS Fund. Growth plans offer you much higher returns and dividend plans offer regular pay-outs.

What is ELSS Fund

ELSS Funds Meaning: ELSS Funds are one type of Equity Fund known for investing a major part of the corpus in equity and equity-related instruments. Also known as tax saving schemes, ELSS Funds provide tax exemption of Rs. 1,50,000 from the annual taxable income as per Income Tax Act Section 80C. The ELSS full form is Equity Linked Savings Scheme and it comes with a mandatory three years lock-in period. Currently, many taxpayers have started investing in ELSS schemes just to avail tax benefits that the fund offers. Suppose you plan to invest in the ELSS Fund schemes, you may avail tax exemption from your invested amount with a limit of over Rs. 1,50,000. Besides, an income you earn under the scheme at an end of the 3-year period is considered as LTCG or Long Term Capital Gain and taxed at 10% (if profits exceed Rs. 1 Lakh).

Features of ELSS Mutual Funds

• ELSS Funds tax benefit: They allow an investor to avail tax deductions of Rs. 1,50,000 per year as per Income Tax Regulation under Section 80C.
• Before investing, an investor must know what an ELSS Fund is, this fund comes with a 3 year lock-in period, and there are not any provisions of making the premature exit.
• Around 80% of your total investible corpus will be invested in equity and equity related instruments.
• An investor can start investing with any amount in their ELSS Funds, there’s not any upper limit or capping, whereas the minimum investable amount differs over various fund houses.
• These funds are also known as tax-saving investment options that has a potential to provide inflation-beating outcomes.
• ELSS Funds investment offers you twin benefits of wealth creation and tax deductions.
• An ELSS Fund portfolio mainly consists of equities, whereas they have a little exposure towards the fixed-income securities too.
• Profits will be treated as capital gains be it long-term or short-term depending on the time between purchase and sale of the investment & taxed as per the government tax rules.

What are the benefits offered by ELSS Mutual Funds

Before we go towards benefits, check out the ELSS Fund meaning, this fund offers an opportunity to make reasonable returns as well as save tax. The funds invest over 80% in Equities. Hence, the returns that you can earn over them will be linked directly to the performance of the stock market. This will be the most appropriate option in case you are looking to invest for the medium to long-term.

An investor may avail the tax deduction on their investments of Rs. 1.5 Lakhs in each financial year. The funds come with mandatory 3 years lock-in period. It is the shortest lock-in tenure compared to various tax-saving investment options available to you. All the benefits make the ELSS Funds one of the popular investment choices among investors.

• Shortest lock-in period: ELSS full form is Equity Linked Savings Scheme has just 3 years of the mandatory lock-in period. The tax-saving deposits have 5 year lock-in period, whereas PPF has 15-years of maturity. Hence, ELSS provides higher liquidity in the medium term.
• Get better returns: In ELSS Funds returns are market linked, but other 80C investments such as PPF and FDs are considered to be the fixed income options. ELSS has the potential of getting better wealth in the medium and long-term investment options.
• Good post-tax returns: LTCG from the ELSS Funds are tax free over Rs 1 lakh limit. But, gains above Rs 1 Lakh attract a tax rate of only 10%. The lower tax rates and higher returns make sure better post tax returns.
• Investing regularly is convenient and trouble-free: It is simple to invest in the ELSS Funds via monthly SIP.

Why should you invest in ELSS Tax Saving Mutual Funds

We will look at the ELSS Fund tax benefit and understand more about what is ELSS Fund:

• Lower minimum investment amount: Most of the ELSS schemes let investors begin investing with just Rs.500. It ensures you can start investing in ELSS without accumulating investible corpus.
• Diversification: The majority of the ELSS Funds invest over a wide group of companies that will range from the Small-cap and Large-cap and over different sectors. It allows you to add certain elements of diversification to your fund investment portfolio.
• SIPs: Though you may invest a huge amount in your ELSS Fund scheme, most of the investors prefer to invest through the SIP method since it allows them to invest in small amounts as well as avail several tax benefits all along with the opportunity to generate wealth.

In addition, you may invest any amount you want and avail of tax benefits limited by the Income Tax Regulation Act under section 80C. Also, an investor can stay invested in this fund after a stipulated 3 years lock-in period for the long period they want.

Factors to consider before investing in ELSS Funds

You need to consider the following factors when you plan to invest in the ELSS Mutual Fund:

• Investment horizon: First you must have an investment horizon of five years longer to invest in the ELSS Funds. An equity exposure of the ELSS Funds needs you to have a longer investment period to mitigate the market volatility.
• Returns: You have to know that the ELSS Funds don’t offer guaranteed returns since they’re dependent totally on the performance of underlying security. However, having an investment horizon of more than five years will provide much better returns than other tax-saving fund options that are available to you.
• Lock-in period: The ELSS mutual funds generally come with a three years lock-in period that is the best compared to other fund avenues. The investments will be locked in mandatorily for 3 years from their date of investment, so an investor can’t redeem the holdings until this period gets completed.

As it is evident from the ELSS Fund meaning, these funds fare much better than various tax-saving funds, with the shortest lock-in period of 3 years and improved returns. They’re tax-efficient. Suppose you’re looking for a good tax-saving investment plan, then ELSS Funds are the best choice.

How to invest in ELSS Funds through Nivesh

Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:

• Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
• On your portfolio page click on the Buy New tab at the right top corner of the screen.
• Select the category and choose the funds you want to purchase.
• If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
• Fill the transaction details and confirm. You can place up to 5 orders in one go.
• You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.

Frequently Asked Questions (FAQs)

1. Are ELSS Funds Risk-Free?

As its name suggests, the ELSS Funds are Equity Funds. Just like other market-related mutual funds out there, the funds are subject to risks that are associated with this stock market. However, you may mitigate the risk just by investing in the ELSS with the long-term approach.

2. How Long Should we Invest in ELSS Funds?

Due to their mandatory lock-in periods, investors must stay invested for at least 3 years while investing in these funds.

3. Can we Redeem the ELSS Mutual Fund Before 3 years?

The ELSS investment comes with a 3 year lock-in period which means you may withdraw the funds from this scheme just after the 3-year term when your investment is done. Coming to the question, can you redeem ELSS mutual fund before 3 years, then answer is you cannot withdraw from your ELSS mutual fund before its lock-in period.

Mutual Funds give you much better returns providing you stay invested in the fund for the long term period. Even in the ELSS Mutual Funds, you must refrain from redeeming the funds after its lock-in period, as the longer investment will be bound to offer you much better returns.

4. What is the Minimum Amount to Invest in ELSS Funds?

You can either invest a lump-sum amount or start SIP. The minimum amount that you invest in ELSS Funds is Rs. 500. The best part is there is not any maximum limit to make an investment in ELSS Funds. Hence, one can start with just Rs. 500 and increase their portfolio.

5. Can we Redeem ELSS Funds Anytime?

You can withdraw your ELSS Funds only after you complete its 3 years lock-in period. After that, you can withdraw anytime you want. ELSS is an open-ended mutual fund type that has 3 years of a lock-in period. This lock-in period will be for both SIP and lump sum investment.