ELSS Benefits: Not Just a Tax Saving Option but a Good Investment Plan
As the financial year-end draws closer, you are most likely looking for the best tax-savings products. You may relook at the different options that are available to make the most appropriate product choices.
Some of the popular tax-savings financial instruments include Public Provident Fund (PPF), National Savings Certificate (NSC), life insurance plans, Senior Citizens Savings Schemes (SCSS), Employee Provident Fund (EPF), Five-Year Fixed Deposits (FDs), and Equity-Linked Savings Scheme (ELSS). All these instruments offer tax deductions of up to INR 1.5 lakh per annum under section 80C of the Income Tax (IT) Act, 1961.
What is an ELSS fund?
ELSS funds are types of mutual funds that offer tax benefits and have a lock-in period of three years. The majority of the fund corpus is invested in equity and related products. The remaining corpus is invested in debt and related instruments. Because these funds are related to equities, there is a certain level of risk associated with the volatility of the markets.
Even though ELSS is a tax-saving investment option, it is recommended you stay invested in the same for a longer period.
What are the benefits of ELSS fund?
Here are three are the benefits of ELSS that makes it not only a tax-saving financial product but also a good investment plan:
- High returns
- Beats inflation
- Acts as alternative to close-ended mutual funds
Let us now understand each of these in detail:
Higher returns via ELSS
ELSS funds are categorized as diversified equities beneficial for investing for the long-term. In order to be eligible for the tax deductions, you are not allowed to exit your investment for at least three years. Therefore, your capital remains locked-in during this period. Although you may consider the lock-in period as a disadvantage that limits your liquidity, there are benefits of investing in these funds.
To earn returns through equity investments, it is important to remain invested for longer. Because the minimum lock-in period is three years, your capital has sufficient time to earn higher returns. Furthermore, ELSS plan corpus is invested in equities, which enables capital appreciation. Therefore, your long-term investment returns are higher when compared to FDs, PPF, and other fixed income investment options.
Beat rate of inflation
Equity investments are capable of delivering higher returns that beat the rate of inflation. Bonds, FDs, and other similar products offer guaranteed returns but may not be able to combat the inflationary increase. The real return on fixed income investments is lower when compared to the returns earned on these tax-saving investment plans.
The three-year lock-in period mandated by ELSS investments allows fund managers to take long-term investment calls. The inflow and outflow of funds in such schemes is not very volatile, which enables better fund management. Fund managers have lesser difficulties because of lesser portfolio turnover. Therefore, it is recommended you invest in ELSS not only at the end of the financial year to enjoy tax benefits but throughout the year. Experts advise you to invest in ELSS through a systematic investment plan (SIP). A SIP is an arrangement where a fixed amount is invested in the fund of your choice at regular intervals. An ELSS SIP is able to deliver higher returns in the long-term.
Alternate investment to close-ended funds
Several mutual funds are offering close-ended funds to encourage investment discipline through long-term investing. ELSS funds work on the same principle wherein your capital stays invested for at least three years. However, an advantage of ELSS over close-ended funds is that you are able to withdraw your money at the end of the lock-in period.
Additionally, new close-ended fund offerings have no performance history. In comparison, ELSS plans have a track record for a few years, which provides an alternative investment avenue for you. Furthermore, close-ended funds do not allow SIPs, which means to maximize your returns you will have to invest a larger lump sum amount. On the other hand, ELSS allows SIP investments; however, the lock-in period is applicable to each installment of your systematic plan.
You may withdraw your money from an ELSS after three years. However, professionals recommend that you stay invested if the fund is performing well. There is no compulsion to exit your ELSS investments at the end of the lock-in period. Historical performance of such funds has been better when compared to multi-cap, large-cap, and mid-cap open-ended mutual fund schemes.
It is recommended that you evaluate the fund’s performance after three years to determine if you should remain invested. If you do not require the money, it is advisable to allow your money to stay invested. However, you must remember that ELSS plans are equity-linked investments and are subject to market conditions and volatility. These schemes do not guarantee fixed returns on your investments.
Stay invested and earn higher returns with ELSS funds. Now invest in ELSS fund easily with the Angel Bee app. So download now and start investing.