How Can ELSS Funds Enhance Your Wealth

The equity-linked savings scheme (ELSS) is an equity mutual fund, which comes with a lock-in period of 3 years. Over the years, ELSS funds have caught the attention of investors from different age and income groups. The inflows into tax saving schemes in the first six months of the current financial year have reached to Rs 4,292 crore in 2017 from Rs 2,332 crore in the same period a year ago.

The most important feature of this product is that apart from helping you in saving tax, it also creates wealth in the long run by letting you fetch market returns.

What Makes ELSS Funds an Attractive Option?

  • High returns over the long run

While yields on ELSS funds are subject to market risks, equities generate inflation-beating returns in the long run.

Here is how ELSS funds are faring over other investment options.

Type of Investment Interest or returns Lock-in Period Risk Profile
PPF 7.8% (fixed) 15 years Risk-free
ELSS funds 11% to 18% (varies) 3 years Market-related risks
NPS 8% to 10% (expected) Till retirement Market-related risks
FD 5% to 7% (fixed) 5 years Risk-free
NSC 7.8% (fixed) 5 years Risk-free

  • Lowest lock-in period

While traditional tax-saving instruments like PPF and NSC come with a long lock-in period of 15 years and five years, respectively, ELSS funds have a lock-in period of only three years. It means, your money doesn’t get blocked for a long duration, and you can always withdraw funds from those SIPs which have completed the lock-in period.

  • High degree of flexibility

ELSS funds offer a high degree of flexibility in comparison to other tax-saving investment options. An investor can start investing in ELSS funds with an amount as little as Rs 500, unlike other equity-oriented investment options where the minimum investment amount is Rs 5,000. In traditional investment avenues, where you would have to stay invested in only one type of investment option, with ELSS funds, you get a chance to diversify your funds and benefit from them. As these tax-saving mutual funds do not have any expiry date, you can stay invested in an ELSS fund even when the lock-in period expires.

Though, it is strongly advised to invest regularly, if you miss any of your ELSS instalment due to unavoidable reasons, there would be no penalty charges levied by the fund house. You can deploy any windfall gain or bonus in ELSS funds in the middle of the year rather than let it sit idle in your bank saving account.

  • Triple Tax Benefits

ELSS funds currently enjoy the EEE tax status, i.e., Exempt, Exempt, Exempt (EEE). It means, not only your invested amount, but the returns you generate are also tax-exempted. Further, after the lock-in period is over, the returns you get are considered as long-term capital gains and become tax-free. This is what makes ELSS fund an attractive option.

  • Systematic Investment via SIP

Mutual funds offer investors the benefit of disciplined investments via SIP. Instead of making bulk purchases, you can provide an ECS mandate to your bank so that a fixed amount on a pre-decided date gets automatically debited from your bank account towards ELSS funds. Further, as you would be investing in ELSS funds systematically, it will not put undue pressure on your current finances.

Moreover, you would be able to enjoy the rupee cost averaging as well. Making a lump sum investment in ELSS funds means you might miss out on the best price. However, when you make a systematic investment, you can fetch the best price. Over a period, your SIP investment can lower the effective cost and enhance the yield on ELSS funds.

Unlike other investment options like NSC, bank fixed deposits, PPF, etc.; ELSS fund is an essential long-term wealth creation tool due to its constant exposure to equities. It is an apt option which you can use to meet long-term goals, like child’s education/marriage, retirement, etc.

ELSS funds Beat Normal Equity Funds— How?

It can be due to two reasons. Firstly, as an ELSS fund has a 3-year lock-in period, it means, an investor must hold onto ELSS funds for the minimum three years. This lock-in period helps in infusing the sense of discipline in an investor who doesn’t follow the usual tendency of traders to enter and exit as per the market conditions.

Secondly, since a significant chunk of the fund stays locked, the fund manager gets ample time to maintain the sufficient liquidity and deal with redemptions. The lock-in period explains why the ELSS funds tend to outperform as an asset class.

A Final Word of Caution

Though, investment is essential, choosing the right investment avenue is more critical. By investing in ELSS through SIP, an investor not only diversifies the portfolio but also gets good post-tax returns. Although, equity-linked ELSS funds come with some market risks, however, if you are investing with the intention to stay invested for more than three years, ELSS is the best option.

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Geekopedia Editorial Team
Curated Content from the Editorial Team of Geekopedia
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Curated Content from the Editorial Team of Geekopedia

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