ELSS Mutual Funds

There are certain risks linked to equity funds like liquidity risk and market risk. However, a good ELSS can generate 10-12% in the long run which is worth taking a chance for. It offers the twin benefits of ELSS tax savings and wealth creation.

 Here are the top features:

1. The fund invested is in a well-diversified manner across multiple themes, sectors and market capitalizations. They also consider many companies ranging from small-cap to large-cap.
2. There is no upper capping on the amount you can invest in the ELSS. Neither is the investment tenure limited. But the minimum amount usually varies from one fund house to another. You can start with as low as ₹500.
3. ELSS is the only mutual fund scheme that is able to offer inflation-beating returns,
4. Most investors prefer the systematic investment plans (SIP) method instead of the lump sum. This way you can invest small yet accumulate sufficient wealth.

Make sure to analyse the scheme’s performance over the last 10 years at least. Also, try staying invested for at least 5-7 years to stabilise despite the lock-in period. ELSS is inherently volatile, and a short-term investment horizon is good to avoid.

Factors to Consider Before Investing in ELSS Mutual Funds

Choosing the right equity fund might boost investment and help you see great gains. Below are a few parameters that will tell a good ELSS from a bad one. Read on.

Investment Horizon: Make sure the tenure is at least more than 5 years. Equity exposure of ELSS funds requires a longer horizon to be able to mitigate market volatility.

Lock-in Period: You are not allowed to redeem your holdings for the next 3 years. So, make your financial planning knowing that you can only sell your investment after this period.

Risk Appetite: Pick an ELSS only if you have an aggressive or moderate risk profile. This is because any investment in the equity market comes with high risks. You may choose a multi-cap approach or mid/small cap biases if you have a high appetite.

Is ELSS Mutual Funds Good for You?

ELSS is the best option for salaried individuals who wish to balance risk and return on their investment portfolio. While ULIPs and NPS have a high lock-in period and less return potential ELSS has a mandate period of 3 years only which has significant returns. This makes it ideal for the fixed-income group.

First-time investors can consider ELSS mutual funds for a number of reasons.

• The risk is minimised if you invest for less than 5 years.
• Great tax savings under 80C of the Income Tax Act.
• Managed by fund managers with great expertise and knowledge.

They also get introduced to equities and what it is like to invest in mutual funds.

Why invest in ELSS?

It comes with excellent tax saving potentials than traditional tools like NPS and FDs. The lock-in period is also short which makes it more attractive.

What to know before investing in ELSS?

Keep in mind that the market risks associated with the portfolio differ across funds. Yet it is able to reap the rewards of a high market.

Is ELSS dependent on market moves?

Yes, the success of ELSS mutual funds is determined by market fluctuations. Work with a fund that has shown a consistent track record over the years.

What is the minimum investment amount required for an ELSS?

Most funds allow investments in Equity Linked Savings Schemes (ELSS) for as low as Rs 500. A few mutual funds have even started allowing minimum investments of Rs 100 in ELSS, especially in their systematic investment plans (SIPs).

Can I withdraw or liquidate my ELSS investments before 3 years?

No, you cannot. There is a mandatory lock-in period of 3 years for investments made in ELSS. You can only withdraw your investments in an ELSS after three years. However, for SIPs in ELSS you can stop further investments at any time you want.

What happens after the 3-year lock-in period ends?

After the mandatory 3-year lock-in period ends, you are free to redeem or withdraw your investment from the ELSS fund that you have invested in. 

How are ELSS returns taxed?

ELSS have some tax benefits. Investments in ELSS up to Rs 1.5 lakh in a year are tax deductible. So you can deduct the amount you invest in an ELSS in a year (up to the upper limit of Rs 1.5 lakhs) from your taxable income while calculating your tax liability.

Due to the three-year lock-in period provision, any gains that you make on selling your ELSS investments after 3 years are treated as long term capital gains. However, these capital gains are exempt from taxation up to Rs 1.25 lakhs in a year. For gains above Rs 1.25 lakhs in a year, taxation is done at the rate of 12.5%.

Can I switch between ELSS funds?

You can switch between ELSS funds after the compulsory 3-year lock-in period ends. Switching requires withdrawal from one ELSS fund and investment in another. So the mandatory 3-year lock-in period needs to expire for switching between ELSS funds.

Can NRIs invest in ELSS?

Yes, NRIs can invest in ELSS. They need to open a Non Resident External (NRE) or Non Resident Ordinary (NRO) account with a bank for investing in ELSS.