Over the past few years, Equity Linked Savings Scheme, commonly known as ELSS,have caught up with other modes of investment.These funds put at least 80% of their corpus in equity and equity-related securities.Due to the increase in popularity of these tax-saving investments, individuals all over are curious about the pros and cons of investing in ELSS funds. Let’s delve into it.
Pros of investing in tax saver mutual fund scheme
Following are some of the advantages of investing in ELSS funds:
- Tax savings
ELSS mutual funds are also known as tax-saving mutual funds as they qualify for tax deductions for investments up to Rs1.5 lakhs.An individual can save up to Rs46,800 by investing in these tax-saver mutual funds. ELSS funds are the only class of mutual funds that offer tax-saving benefits to its investors.
- Lowest lock-in period
ELSS funds enjoy the lowest lock-in period against all Section 80C tax-saving investments. While the Public Provident Fund (PPF) and Fixed Deposits have a lock-in period of 15 years and 5 years respectively, ELSS are endowed with just 3 year lock-in period.
- Higher returns
Since ELSS funds invest predominantly in equity-related securities, the returns are significantly higher than other tax-saving investments. While alternate tax saving options offer returns at an average 6-8%, ELSS provides an average return of a whopping 12-14%.
- Lower tax on capital gains
Since ELSS mutual funds are invested for a minimum of 3 years, gains earned from their redemption or sale are long-term in nature. Long-term capital gains or LTCG above Rs1 lakh is taxed at the rate of 10% in contrast to short-term capital gains or STGC which are taxed at 15%.
- Power of compounding
Though the lock-in period for mutual funds is quite low, investors are advised to invest for 5-10 years to achieve their financial goals. This enables investors to benefit from the power of compounding in the long run.
- Ease of investment
You can invest in ELSS via a Systematic Investment Plan (SIP) or via lumpsum. While the lumpsum method requires all the capital to be invested at once, SIP gives you the liberty to invest a fixed amount in periodic intervals. SIP aids to instil financial discipline among investors.
Just like any other mutual fund, ELSS mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and are entirely safe and transparent. All Asset Management Companies (AMC) managing ELSS funds have to provide regular disclosures about the key performance of these tax saving mutual funds.No mutual fund tax saver exhibits a higher degree of transparency than ELSS funds yet.
Cons of investing in ELSS
Just as there are two sides to every coin, ELSS is accompanied by its own set of drawbacks. Following are some of the disadvantages of investing in ELSS mutual funds:
- Limited tax benefits
Under Section 80C of the Income Tax Act, 1961 investors are bestowed with a deduction of up to Rs1.5 Lakhs for investments made against specific avenues for a particular financial year. This limit is inclusive of all other Section 80C investments of the taxpayer. Therefore, if an individual has already reached the limit under Section 80C, they can avail tax deductions on ELSS mutual funds.
- Overall benefits are dreary
The biggestturn off for most individuals investing in ELSS is the fact that they are eligible for tax benefits of only Rs 1.5 Lakhs. For instance, if an individual invested Rs10 Lakhs in an ELSS fund in a current financial year. However, the individual would enjoy the tax benefits of just Rs1.5 Lakhs.
ELSS funds are a good, tax-saver mutual fund choice for individuals yearning to earn higher returns through exposure to equity-related securities. Since the tax benefits of Section 80C investments are limited to Rs1.5 lakh each year, it won’t make sense to invest in ELSS mutual funds with the sole purpose of saving tax. All in all, ELSS funds have the potential to offer significantly high returns than any other tax-saving investment avenue. Happy investing!