Equity Linked Saving Scheme (ELSS) Mutual Funds
Equity Linked Saving Plan, often known as ELSS, is a form of mutual fund scheme that predominantly invests in the stock market or equity, as its name indicates. Under section 80C of the Income Tax Act, investments made in ELSS mutual funds up to $1.5 lac are tax deductible. The fact that ELSS has a 3 year lock-in period is an advantage over other tax saving vehicles. This indicates that you can only sell your investment three years from the date of acquisition. However, it is advised to hold onto your assets for as long as possible to maximise the earnings from ELSS funds. Each instalment of an ELSS SIP (Systematic Investment Plan) includes a three-year lock-in period, therefore each instalment will have a distinct maturity date.
Read More:- What is ELSS and its Advantages? 2023
1. How ELSS Mutual Funds Work?
Diversified equity funds include ELSS Funds. According to their investing goals, these funds invest primarily in a certain percentage of listed company equities. Market capitalization (Large Caps, Mid Caps, Small Caps) and industrial sectors are taken into consideration while selecting the companies. Over the long term, these funds seek to maximise wealth appreciation. To produce the best risk-adjusted portfolio returns, the fund manager selects equities after completing a thorough market analysis.
2. ELSS Tax Benefits
Section 80C of the Income Tax Act of 1961 provides tax incentives for investments made in ELSS funds. While there is no cap on the amount that may be invested, the Income Tax laws only allow for a tax deduction of up to Rs. 1.5 lakh, which translates to a tax savings of up to Rs. 46,800 every year.
3. Who Should Invest in ELSS Mutual Funds
Salaried People: As a salaried worker, you are required to contribute a specific amount to your Employee Provident Fund (EPF), a guaranteed income instrument. ELSS is the greatest choice if one wishes to balance risk and return on their investment portfolio. Investments in ELSS are also tax deductible under section 80C, in addition to the potential for extraordinary returns. While the National Pension Scheme (NPS) and Unit Linked Insurance Plans (ULIPs) also provide the same functions, they do so with a longer lock-in period and lower potential returns. For instance, ULIPs have a five-year lock-in term. The invested amount in NPS is locked until the end of the investment period, making it more of a retirement option with some exposure to equities.First time investors: ELSS is a great option for novice investors since, in addition to tax advantages, you also get a taste of mutual funds and equities investment. The risk associated with stock investments is larger, although often just in the near term. The risk is substantially reduced if you invest for more than five years. The ideal strategy is to start investing in monthly SIPs throughout the year, just as with any stock investments. SIP in an ELSS fund enables you to collect more units during bear markets and to produce excellent returns during bull markets. To fully grasp the advantages, read our blog post Why ELSS should be your first Mutual fund?
4. Things To Consider Before Investing in ELSS Funds
Fund returns: Before choosing a fund, check to see if it has a track record of consistent success by comparing its performance to that of its peers and benchmark. A fund generates large returns if it surpasses its benchmark or rivals.
History of fund house: It is advised to select fund companies with a track record of consistent performance over an extended time, say five to ten years.
Expense ratio: The expense ratio shows how much of your money is spent on fund management. It is always preferable to choose funds with lower expense ratios because they allow for higher take-home returns.
Financial parameters: To analyse the performance of a fund, you may also take into account a number of other factors, including Standard Deviation, Sharpe Ratio, Alpha, and Beta. A fund that has a greater beta and standard deviation is riskier than one that has a lower beta and deviation. Select investments with a greater Sharpe ratio.
Fund manager: Another element to take into account is the fund manager, since this individual is crucial to the management of your savings. The fund manager needs to be capable and experienced in selecting the best stocks and building a solid portfolio.
5. Top Performing ELSS Funds
Choosing a fund may be a difficult undertaking at times; the best course of action is to compare and analyse the numerous aspects of available funds before making a decision. Not only that, but a person's financial objectives, time horizon for investing, and level of risk tolerance all play a role in fund selection. Based on returns over the last three years, the top-performing ELSS funds are shown in the following table.
