ELSS stands for Equity Linked Savings Scheme, which falls in the category of mutual funds. However, ELSS has a few differences with that of mutual funds in terms of benefits and more. ELSS is considered as a progressive step in the stock market for the investors since it offers tax benefits alongside good returns. Thus, it is also considered as tax saving mutual funds.
Besides, there are various benefits that an ELSS offers, which makes it better than a mutual fund scheme to some extent. Moreover, you can also invest in ELSS online. Here is the list of benefits you gain from an Equity Linked Savings Scheme.
Unique features of an Equity Linked Savings Scheme or ELSS that make it different from other equity mutual funds
Tax benefits: According to the section 80C of the IT Act, a fund manager can claim a tax deduction in the investments of up to Rs. 1,50,000.
3-years lock-in period: The ELSS comes with a lock-in period of three years. Among all other tax-saving funds, the ELSS is a fund that comes with the shortest lock-in period.
Higher returns: ELSS can provide an investor with high returns. Most of the investments under section 80C offer returns in one-digit (on average), which can range between 6% to 8%.
Convenient to invest: You will be required to go through the step-by-step instructions on how you can invest in a mutual fund scheme. The process of investment in ELSS involves a systematic investment plan known as SIP. While it is offered for a tenure of 3 years, you can also extend the units thereafter.
Post-tax return is good: Considering all the 80C investments, Equity Linked Savings Scheme offers a better post-tax return. This is because of the exemption of the long-term capital gain of up to Rs. 1 lakh from income tax.
On the other hand, before the investment in the ELSS, an investor should keep a few things in mind. You should know why you want to invest in an ELSS. If you are not looking for a lock-in period, this option would not be suitable for you. Just because this investment plan has the potential to offer a higher return doesn’t mean it would be suitable for you. If you want to take the risk of investing in the equity fund, you can go for ELSS.
Since ELSS can meet the requirements of your financial plan, it can be suitable for your long-term financial goals. Just because you have the option of a 3-year lock-in period, you need not redeem it if there is no major requirement. In fact, these are essentially equity mutual fund schemes, where you can invest for a higher horizon like 5 to 7 years.
However, be aware that if you plan to hold on with the scheme, ensure that the past record has been well. In case you face difficulties, you can opt-out of the scheme. Selling would be a better choice than bearing a loss. Lastly, you will need to check all the ELSS plans if you want to invest in the scheme. The research will always help you come up with the best option in the market.