What Are ELSS Funds?

If you are looking to grow your wealth while enjoying tax deductions, you will be happy to know that the market offers just the product for it. Equity-Linked Saving Schemes (ELSS), a category of mutual fund (MF), helps you fulfil these two goals. Whether you are an early or a sophisticated investor, you can secure tax-efficient returns with an investment in an ELSS scheme.

Read on to understand how ELSS works and reduces your tax outgo while delivering a good return on your investment.

What are ELSS funds?

Equity-Linked Saving Scheme is a specialised MF scheme that invests in equity and equity-related financial instruments. In this scheme, at least 80% of the corpus is invested in equity-linked securities.

While there is no maximum investment tenure, a lock-in period of three years is standard. This means you cannot make a premature exit. The fund’s assets under management (AUM) are diversified across several market themes, capitalisations, and sectors.

Since this is an equity-oriented scheme, you can earn superior returns on your investment depending on the stock market’s performance. To maximise benefits on this mutual fund, opt for a long-term investment. You can start by establishing your investment goals as the year begins and invest through lump sum or Systematic Investment Plans (SIP). Use Tata Capital Moneyfy’s SIP calculator and get an estimate of how much your investment will grow towards the end of the tenure.

Additional Read: Is ELSS a Wealth Creation & Tax-Saving Tool?

How does ELSS act as a tax-saving tool?

ELSS is a popular tax-saving instrument. But before we dive into its tax benefits, let us answer the question - what is a tax saver mutual fund?

For a taxpaying investor, a tax-efficient schemereduces tax liability and is eligible for tax deductions under Section 80C of the Income Tax Act. The Income Tax Act grants ELSS numerous tax benefits. Why? Since you lock in your funds for a minimum of three years in this scheme, the generated returns are treated as long-term capital gains (LTCG) from equity schemes.

Section 80C of the Act ensures that ELSS investments up to Rs. 1.5 lakh qualify for tax deductions for your taxable income in a financial year. The maximum marginal tax rate on returns is 30%, but only 10% is charged on ELSS funds.

What are ELSS funds known for?

Hedge against inflation

This tax-saving scheme has the shortest lock-in period. But, if you invest steadily across the year, you can decrease your exposure to market volatility and generate long-term wealth. ELSS funds are one of the only tax-efficient investment options promising inflation-beating returns.

Low minimum investment

You don’t need a huge amount to start reaping the benefits of this wonderful scheme. Start investing with an amount as small as Rs. 500! The minimum investable corpus varies from one fund house to another.

Diversification

While ELSS funds primarily comprise equities, they also include fixed-income securities. With an ELSS fund, you can easily diversify across small-cap to large-cap companies across sectors.

Additional Read: ELSS: Wealth Creation Analysis

Summing up

While shorter lock-in periods are appealing, having an investment horizon of over five years promises superior returns. Since most investment instruments have equity exposure, you can mitigate market volatility with a longer investment horizon.

Besides, you can opt for the SIP method or invest a lump sum in an Equity Linked Saving Scheme. With a SIP, you can invest small amounts across periods. However, if you have an extended investment horizon like 5-7 years and the markets possess a bearish trend, investing a lump sum can help you realise good gains.

Now that you know what is ELSS, grow your capital with Tata Capital’s Moneyfy App today. Leverage our host of features to fine-tune your investment strategies and align them with your financial goals.