Everything You Need to Know About ELSS Funds

An ELSS fund is a mutual fund that invests primarily in equity instruments such as stocks and shares. They are also known as tax-saving Funds because they offer investors a deduction on their taxable income up to one lakh fifty thousand rupees per annum. This makes them an attractive investment option for those looking to reduce their tax liability while also growing their wealth over time. This article will look at everything you need to know about ELSS funds, including how they work and tips to invest in them. 

What Exactly are ELSS Funds?

ELSS funds are equity-linked savings schemes that offer tax benefits under Section 80C of the Income Tax Act, 1961. ELSS funds invest in a diversified portfolio of equity shares and work like any other mutual fund scheme.

However, ELSS funds have a mandatory lock-in period of 3 years, which is the shortest among all investment options under Section 80C. This makes them ideal for long-term goals such as a child's education or retirement planning.

The returns from ELSS are linked to the performance of the underlying equity markets and are subject to market risks. However, ELSS funds have outperformed most other asset classes over extended periods, including fixed income instruments such as bank deposits and government bonds.

Key Features of ELSS

 Here are some of the essential features of ELSS mutual funds: 

1. Investments in ELSS are subject to capital gains tax. Short-term capital gains (gains made on assets held for less than one year) are taxed at 15%. Long-term capital gains (gains made on investments held for more than one year) are taxed at 10%. 

2. Since ELSS funds invest primarily in equities, they offer the potential for higher returns over the long term compared to other fixed income instruments such as PPF, NSC, etc. 

3. While there is no limit on how much you can invest in an ELSS fund, investors should remember that returns from these funds are not guaranteed, and they could lose money if markets fall sharply. 

4. Unlike most other mutual fund schemes, which have load structures designed to discourage short-term buying and selling, ELSS funds do not have any entry or exit load. 

5. ELSS mutual funds offer the convenience of systematic investment plans (SIPs), which allow investors to invest small amounts of money every month instead of making a lump sum investment. 

6. Equity-linked saving schemes also offer the facility of tax deduction at source (TDS), which means that if you invest more than rupees one lakh in an ELSS fund in a financial year, the mutual fund company will deduct 10% TDS on your investment.

Keep Track of Your Investment.

After you have made your investment, it is vital to keep track of it. This will help you see how the fund is performing and whether it is meeting your expectations. The best way to do this is by using a mutual fund tracker.

A mutual fund tracker is a tool that allows you to track the performance of your mutual fund investments. It will show you the current value of your investment and the changes in value over time. Additionally, it will provide information on the fund's expenses, so you can see how much of your investment is being eaten up by fees.

There are many different mutual fund trackers available online, so take some time to find one that suits your needs. Once you have found a tracker, enter the details of your investment and start tracking!

Why Should You Invest in ELSS Tax-Saving Mutual Funds?

Here are a few reasons why you should consider investing in ELSS tax-saving mutual funds:

• They help you save taxes: As per the Income Tax Act, investments in ELSS schemes are eligible for a deduction of up to Rs. 1.5 lakhs from your total income. This can help you save a significant amount of taxes every year.

• They have a relatively short lock-in period: The lock-in period for ELSS schemes is just three years, compared to other investment options like PPF, which have a lock-in period of 15 years. This means you can access your money much sooner if needed and have the flexibility to exit the scheme before the lock-in period (exit load charges may apply).

• They offer the potential for high returns: ELSS funds allow investors to earn high returns from their investments while also benefiting from tax savings. For instance, if you invest Rs 1 lakh in an ELSS fund with a 3-year lock-in period, you can save up to Rs 46,800 in taxes (assuming a 30% tax bracket). This makes them one of the most popular investment options among taxpayers.

• Flexibility: Unlike other fixed-income investments, you can exit an ELSS fund after three years. This provides greater flexibility if you need access to your money before maturity. 

• Diversification: By investing in an ELSS fund, you get exposure to a diversified portfolio of stocks across various sectors and market capitalizations, which helps reduce risk. 

How To Make the Most Out Of Your Investment in ELSS Mutual Funds

When saving for your future, one of the most brilliant things you can do is invest in ELSS mutual funds. Not only are they a great way to save money, but they also offer numerous tax benefits. Here are a few tips on how to make the most out of your investment in ELSS mutual funds:

1. Start early: The sooner you invest in ELSS mutual funds, the better. This is because these types of investments have a lock-in period of three years, during which time you cannot withdraw your money. However, if you start early and invest regularly, you will be able to reap the maximum benefits from your investment.

2. Invest wisely: As with any investment, it is crucial to invest wisely in ELSS mutual funds. Research various fund options and choose those that best suit your needs and goals. Also, rebalance your portfolio periodically to continue to benefit from market fluctuations over time.

3. Consider tax benefits: One of the significant advantages of investing in ELSS mutual funds is the tax benefits they offer. These investments are exempt from long-term capital gains taxes, saving you considerable money in the long run.

4. Stay disciplined: This means investing regularly and sticking to your chosen investment plan even when market conditions are unfavourable. Doing so will make you more likely to achieve your financial goals in the end.

Conclusion

There are several ways to use ELSS funds effectively, depending on your specific goals. For example, you could use ELSS to grow your company, fund your long-term investment strategy, or pay down debt.

You can also use ELSS funds to purchase stocks or other securities or to make additional investments. To maximize your returns, it's essential to understand the risks involved in each investment option.

If you have questions about using ELSS funds, don't hesitate to contact us. We're here to help you create a strategy that works best for your company.