Equity Linked Savings Scheme (ELSS) funds are like any other mutual fund investment where fund managers raise the capital from different investors. These funds invest in equities and give an additional tax saving benefit to investors.
As these types of funds are market-linked, they are riskier in comparison to other non-market-linked investment avenues and their returns vary as per market performance. Among all the tax saving investment instruments available, ELSS funds have the shortest lock-in period of three years.
You can consider ELSS if you’re looking to grow your wealth and at the same time save your taxes. Let us look at ELSS’ benefits and disadvantages to understand this mutual fund scheme better.
Advantages of ELSS
● Shorter lock-in period
Compared to Public Provident Fund (PPF) or National Pension System (NPS), ELSS has the shortest lock-in period. Therefore, you won’t be locking up your money in an investment scheme for years until it can be withdrawn, making ELSS an attractive investment option.
● Long-term returns
Though you must lock in the funds for three years, you can allow them to grow further by not redeeming them immediately after the lock-in period ends. Investing in equities over a more extended period can lead to considerable wealth accumulation.
● Higher probability of attractive returns
Because these funds invest primarily in equities, you will see relatively higher returns, subject to market conditions. Compared to traditional instruments like bank deposits or a savings account, or investments in debt securities, ELSS funds offer attractive potential returns, along with a higher degree of risk.
● Tax saving
Since ELSS is a mutual fund covered under Section 80C, it is eligible for tax deductions. ELSS tax benefits allow deductions of around Rs. 1,50,000.
Disadvantages of ELSS
● 3-year lock-in period; inability to withdraw funds
You cannot withdraw from the ELSS fund before 3 years have elapsed. On the other hand, there are other instruments that offer premature withdrawals, subject to certain conditions. Thus, if you plan to invest in ELSS or have invested in ELSS, you might want to look for other forms of funding for emergencies or short-term expenditure.
● Market risks
Mutual funds are subject to market risks. As ELSS deals in equity, the market risks differ accordingly. The market fluctuates according to several factors, and similarly, the value of your ELSS also fluctuates.
Is ELSS for you?
The advantages and disadvantages of ELSS are similar to most market instruments. But if you’re a novice investor and plan on investing in mutual funds with an intention to get higher returns, ELSS Mutual Fund could be the right choice for you.
However, if you are an investor who doesn’t like taking high risk, these funds might not be the right option for you to invest in. Irrespective of your investor profile, it is always prudent to reach out to a financial advisor who can help you out with a sound investment strategy that is in line with your financial goals, limitations and risk appetite.
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