Tax saving is an essential aspect of financial planning, and one avenue that combines tax benefits with the potential for good returns is Equity Linked Saving Schemes (ELSS). It is a type of mutual fund that helps you save taxes and allows you to grow your wealth by calculating the expense ratio.
To know more about ELSS, read this post till the end.
What is ELSS?
ELSS is a category of mutual funds primarily investing in equity markets. The unique feature that sets ELSS apart is its tax-saving benefit under Section 80C of the Income Tax Act. Investors can avail of around Rs 1.5 lakh deduction in a financial year by investing their money in ELSS. This not only reduces your taxable income but also encourages wealth creation through equity investments.
Who can Invest in ELSS?
- Individuals who have just started earning.
- If you want to invest only in low-risk, safe investments.
- Individuals of any age group can invest in ELSS.
- If you aim to save tax and diversify your portfolio
- High-risk investors
Types of ELSS
There are two types of ELSS. They are: –
1. Dividend payout
In this, you have two options: dividend payout and dividend reinvestment. In the first case, investors will get a tax-free dividend; in the latter, your dividend will be invested again.
2. Growth fund
It is a long-lasting wealth platform for investors where the complete value of funds is realized during withdrawal.
Benefits of ELSS or Equity-Linked Saving Schemes
1. Tax Benefits
ELSS is a tax-saving mutual fund that delivers attractive tax advantages. Investors can avail a deduction of up to Rs 1.5 lakh under the Section 80C. It reduces their taxable income, resulting in lower tax outflows.
2. Short Lock-In Period
ELSS has a relatively short lock-in period of just three years, the lowest among tax-saving investments. It means your money is not tied up for an extended duration, providing liquidity and flexibility compared to other tax-saving options with longer lock-in periods.
3. Capability of Higher Returns
ELSS primarily invests in the equity market, offering the potential for higher returns. Historically, equities have demonstrated the ability to outperform other asset classes over the long term. ELSS, by its equity exposure, allows investors to participate in the growth ability of the stock market.
4. Systematic Investment Plans (SIPs)
ELSS funds allow investors to start with a Systematic Investment Plan (SIP), enabling them to invest minimum amounts regularly. SIPs promote disciplined investing, reduce the impact of market volatility, and make investing more accessible to individuals with varying budget sizes.
5. Professional Fund Management
Experienced and skilled fund managers manage ELSS funds. These professionals analyze market trends, conduct thorough research, and make strategic investment decisions on behalf of investors. This expertise helps in optimizing returns and managing risks effectively.
ELSS portfolios are diversified across various stocks and sectors. Diversification is a risk management strategy that spreads investments, reducing the impact of poor performance in a particular stock or sector. This diversification helps in maintaining a balanced and resilient investment portfolio.
The Bottom Line
ELSS schemes emerge as a powerful tool for tax saving with the potential for good returns. The combination of various benefits like tax, wealth creation, professional management, and liquidity make ELSS a perfect option for investors looking for a balanced approach to their financial planning.
However, it’s essential to remember that investing always carries some type of risk, and past performance doesn’t show future results. So, before making any investment decisions, it’s recommended to consult with a financial advisor to align your investment strategy with financial objectives and risk tolerance.