ELSS or equity-linked saving scheme is a type of mutual fund scheme where your money is invested across diverse equities and stocks. This particular fund is popular since it allows investors to save on taxes on the earned interest. The fund manager will try to find and invest in equities or equity-related securities that have a strong potential for growth and a strong business model.
Under the Income Tax Act of 1961, investors can save up to Rs. 1.5 Lakhs in taxes from ELSS mutual funds investments. However, before you start investing in ELSS, here are some things that you should know.
- How do equities work?
Many investors eventually want to invest in equities but are unable to do so due to the lack of knowledge about the markets. In ELSS mutual funds, a professional fund management team makes investments for you. Therefore, you get an idea about the working of the market, without having to deal with the risks, firsthand. Furthermore, you do not have to time the markets for changes. You can start your investment in ELSS schemes with just Rs. 500.
- Lock-in period
Equity-linked savings schemes have a 3-year lock-in period. So, if you decide to invest, you need to keep the money engaged for a period of at least 3 years. This is still the lowest among all tax-savings schemes. For instance, a public provident fund has a lock-in period of 15 years. Similarly, the NSC or National Savings Certificate has a lock-in period of 5 years. Still, it is better to approach ELSS investments as long-term schemes, since the best returns come from tenures between 7 and 10 years.
- ELSS investments are risky
Since your money is being invested in equity and equity-related securities, ELSS mutual funds investments are riskier than most other types of tax saving schemes. The equities are volatile and the NAV or the Net Asset Value may fall at certain points during the investment period. However, ELSS investments are still worth it, since these are long-term investments. Therefore, short-term fluctuations in the market are averaged out if you decide to invest for a longer duration. This is why investing for longer tenures reduce the risk and increase chances of a better return.
- Expected returns
Equities are unpredictable and volatile, which is why there is no guarantee of returns on the invested sum. However, if the market is favourable and the scheme manages to perform well, you can expect sizable returns on the capital. The rate of return is directly proportional to the term of the investment. With longer maturity periods, you will be able to navigate the volatility of the markets better and will end up with substantial income.
The tax savings feature of ELSS schemes makes it extremely attractive for investors. Furthermore, if you have an appetite for risk, you stand to gain immensely from ELSS mutual funds investment.
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