Advantages And Disadvantages of ELSS Funds
An ELSS (Equity Linked Savings Scheme) is an equity diversified mutual fund that invests a significant portion of the assets in the shares of companies. Of all the tax-saving investments under Section 80C of the Income Tax Act, 1961, these funds tend to be one of the most tax-efficient and popular instruments.
However, you must weigh the pros and cons of ELSS funds before you invest. This post lists out the benefits and drawbacks of ELSS funds in simple terms. Keep reading!
Advantages of ELSS Funds
Get an insight into the advantages of these funds before taking the plunge!
- Lower tax on profits
You have to invest in an ELSS fund for at least 3 years. Any profits from ELSS funds are deemed to be long-term capital gains. As per the current law, long-term capital gains over Rs. 1 lakh are taxable at 10%. Contrarily, a short-term capital gain will be taxed at 15%. Hence, such funds witness lower tax costs automatically.
- Higher returns
Since these funds make investments in equity schemes, yields are higher (15% to 20%) relative to other tax-efficient options (usually, 7% to 10%). The returns from equity coupled with the power of compounding throughout a period of 3 years offer higher yields for investors.
An ELSS generally earns returns within the range of 15% to 20%. It is the highest among other tax-saving investment options such as FD or PPF that invest over a period of 5 years.
- Redemption is not mandatory post 3 years
If you are happy with the returns from ELSS funds, you can choose to continue. It is not compulsory to redeem the mutual fund units after 3 years. It is just the minimum investment tenure ─ there’s no maximum investment tenure.
- Lowest lock-in tenure compared to other tax-saving options
ELSS funds have a lock-in period of three years in comparison to a lock-in period of 5 years for other tax-saving investment avenues. This duration is the lowest for ELSS funds. A PPF and a fixed deposit can come with lock-in periods of 15 years and 5 years, respectively. This means that ELSS offers higher yields through the lowest lock-in tenure.
- Offers tax deduction
As per Section 80C of the Income Tax Act, investing in ELSS funds can help you get a tax deduction of up to Rs. 1.5 lakh in a financial year. It is the only mutual fund scheme that enables investors to save taxes through investment in equity.
- Safe and Transparent
ELSS is a safe and transparent investment option similar to other mutual funds. This is because it comes under the ambit of SEBI and has to make mandatory disclosure at a prescribed interval.
- Availability of SIP option
There are two modes through which you can invest in a mutual fund. Since lump sum investment might be tough for many, they can choose the SIP (Systematic Investment Plan) option. SIP allows you to invest in a fund at a fixed amount at a regular interval such as daily, weekly, monthly, quarterly, or bi-annually.
You can choose the SIP mode of investment while investing in an ELSS. This allows you to invest a particular amount at a preferred interval.
Also Read: Best Tax Saving SIPs in 2022: 10 ELSS Funds You Can Consider Investing In Through SIPs
Disadvantages of ELSS Funds
Following are the two disadvantages of these funds:
- Limited tax benefits
Tax deductions of up to Rs. 1.5 lakh are inclusive of some other factors such as home loan principal repayment, life insurance premium payment and PPF contribution. This means that if these investments already fetch a deduction of Rs. 1.5 lakh, then no deductions for ELSS funds will be available to investors.
- Total benefits are limited
Tax deductions under Section 80C for a specific fiscal year are applicable to Rs. 1.5 lakh only, regardless of the total amount being invested in an ELSS fund. For instance, if you invest Rs. 8 lakh in this scheme in a financial year, the deduction will be limited to Rs. 1.5 lakh only.
Also Read
Things to Consider Investing in an ELSS Fund
Like all other mutual funds, ELSS comes with its own merits and demerits. However, if you wish to opt for these schemes, you need to keep a few factors in mind to maximise your return and mitigate the risk involved:
- Figure out the investment objectives
- Check the expense ratio of an AMC to ensure increased return on investment
- Review the track record of the fund manager
- Invest according to your risk appetite
- Choose between a regular or direct plan depending on your knowledge and experience in investing
- Check and compare the fund returns with peers and competitors
Final Word
Depending on your preferred investment duration, risk-return appetite and investment objectives, you can start investing in ELSS funds. You can opt for a lump-sum investment option or a Systematic Investment Plan (SIP) as per your requirements.
If you are looking to invest in an ELSS fund and avail tax benefit through such investment, you can opt for ELSS funds from Navi. Navi provides various ELSS schemes such as Navi Long Term Advantage Fund, Navi ELSS Tax Saver Fund Direct-Growth that facilitates a tax deduction under Section 80C. Visit Navi Mutual Fund to get started today!
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
FAQs
The Equity Linked Savings Scheme is highly suitable for salaried individuals as well as those who are investing for the first time. ELSS is a great option to balance out the risk and returns of their investment portfolio.
You can avail a systematic investment plan for investing in ELSS funds. Through this mode, you can invest a fixed sum at periodic/regular intervals. This enables salaried individuals to invest a particular amount periodically (such as monthly, yearly, and quarterly) from their savings.
Compounding refers to the rise in the value of investment because of the interest earned on principal and the accumulated interest. An ELSS fund is a systematic long-term investment option by default due to its lock-in period. So, it facilitates the benefit of compounding to investors in the long run.
ELSS funds invest in numerous equity mutual funds to reduce the risk factor to some extent. This scheme invests up to 80 per cent of its corpus in equity. Equity has the potential to fetch high yields on investments.
Investors with a comparatively high-risk appetite can opt for Equity Linked Savings Scheme. However, ELSS mutual funds are safer in terms of volatility as compared to mid-cap mutual funds and small-cap mutual funds.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
