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Equity Linked Savings Scheme

ELSS gives you the twin benefits of tax saving and return on return.
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What is ELSS?

Equity Linked Saving Schemes popularly called ELSS, is a type of equity diversified mutual fund, which invests most of your money in stocks. ELSS has a compulsory 3 year lock-in. You cannot touch your money for 3 years.

ELSS not only helps your money grow, it also helps save tax. With ELSS, you enjoy the compounding benefits of return on return.

You can invest a lump sum in ELSS or you can invest in ELSS via SIPs (Systematic Investment Plans). SIPs allow you to invest small sums of money regularly, say once a month or quarter, in the ELSS. SIPs help you average purchase costs, bring financial discipline in your life and give you the compounding benefit.

Youth in India must invest in ELSS

ELSS is a very good investment for the youth in India. ELSS invests most of the money in equity and if you stay invested for many years, your investment will grow to a huge amount. This makes ELSS an excellent investment for retirement.

If you don't have much money, consider an investment via SIPs. You invest small amounts regularly and at retirement, you have a huge corpus.

If you are a first time investor in mutual funds, try ELSS. Many first time investors in mutual funds prefer to invest in ELSS, giving it the name, “first mutual fund scheme”.

After you are familiar with ELSS, you can easily try out equity diversified mutual funds and other equity funds. ELSS Schemes give higher returns than equity diversified mutual funds in most cases, as they enjoy tax deductions.

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Why invest in ELSS?

Invest small amounts

You can invest a small amount of Rs 500 a month via SIPs in an ELSS.


       

Short Lock-in

ELSS has the shortest lock-in period among other tax-saving instruments like PPF, Tax Saver FD, NSC and so on.

       

Gives Good Returns

ELSS has a 3 year lock-in period which forces you to stay invested in equities. Staying invested in equities for the long term, generally means good returns.

 

Tax Benefits

The investments you make are tax-free up to Rs 1.5 Lakhs a year under Section 80C.

       
Key Factors To Consider for ELSS

Factors To Consider while investing in ELSS

  • Invest in ELSS at the start of the financial year to save tax. Invest in ELSS through SIP.

  • Look for consistency in the ELSS Scheme. The ELSS Scheme must be a consistent performer for at least 3-5 years.

  • Don't rush to redeem the ELSS after the lock-in period of three years. Stay invested for maybe two more years to pocket higher returns.

  • If you invest in too many ELSS Schemes, it would be difficult to monitor performance. Stick to an investment in just 2-3 ELSS Schemes.

 

Concepts & FAQ's Equity Linked Savings Scheme

What is an ELSS?

Equity Linked Savings Scheme (ELSS), is a type of equity diversified mutual fund which invests most of your money in stocks. ELSS gives good returns over the long term coupled with tax benefits.

ELSS is a very famous investment because it is the only mutual fund which enjoys Section 80C benefit. This investment qualifies for a tax deduction up to Rs 1.5 Lakhs a year. ELSS enjoys the shortest lock-in of just 3 years, among all tax saving investments under Section 80C.

Who should invest in ELSS?

ELSS is very good for people who have just started their career and have a long time to meet financial goals like buying a house, purchasing an apartment and education and marriage expenses for kids.

ELSS invests most of the money in equity and is not suitable for people, who don't have the ability to take risk. If you are risk-averse, stay away from ELSS.

Many new investors are afraid to invest in ELSS, because most of the money is invested in stocks. You can overcome the fear of ELSS, by staying invested for long periods. Many ELSS Schemes have rewarded investors who have chosen to stay invested for long periods of time.

Who should invest in ELSS?

If you have already invested in equity mutual funds, do consider investing in ELSS. ELSS has a compulsory lock-in of 3 years, which helps you get used to volatility in the stock market. This makes ELSS an ideal investment and a great first investment in equity. Once you get used to investing in ELSS, you can easily invest in other equity mutual funds.

What returns can you expect from ELSS?

ELSS invests most of your money in stocks and investors expect massive returns. It is important to be realistic with this investment. You get superior returns on staying invested for long periods, but do not expect the same performance every year.

Have a realistic expectation of 10-12% tax free returns from ELSS over long periods.

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Mistakes to avoid while investing in ELSS

Avoid investing in ELSS at the last minute.

Do not invest in ELSS at the end of the financial year, just to save tax. Investing in ELSS at the last minute will force you to invest a lump-sum. Invest in ELSS at the beginning of the financial year through SIP, which gives the benefits of rupee cost averaging and the compounding benefit.

Invest without understanding the category of funds.

AMCs offer ELSS mutual funds as large, medium and small cap funds. Risk varies depending on the type of funds. Take the help of a financial advisor to understand the fund and make a suitable investment.

Choosing the wrong option.

Just like other equity funds, ELSS offers both the Dividend and Growth Option. Select the growth option to enjoy compounding benefit, as your gains are reinvested and your money grows. If you choose the dividend option, you end up spending the dividends and compromising future financial goals.

Focus only on past performances.

In an ELSS, past performances are no guarantee of future returns. Identify ELSS Schemes which are consistent performers. Take a look at the performance of the ELSS Scheme over 5 years before making investing decisions.

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