ELSS funds are considered one of the most popular types of mutual funds among investors. Apart from bringing diversity to an investor's portfolio, these funds also come with an added tax advantage. An ELSS fund is typically recommended to beginners and all new investors for its dual benefit of taxation and capital appreciation/high returns potential.
In this blog, we learn more about ELSS mutual funds and their features, benefits, and ways to invest in them.
What Are ELSS Funds?
ELSS or Equity-Linked Saving Schemes are one of the categories of mutual funds (open-ended mutual funds) that primarily invest in equities. Being equity-heavy in nature, they give you the advantage of generating inflation-beating returns in the long run. Also known as tax-saving mutual funds, ELSS schemes help you save income tax under section 80C of the Income Tax Act.
Some key features of ELSS funds are-
- ELSS funds invest a large percentage (80% or more) of their overall corpus in equity.
- They come with a compulsory lock-in period of 3 years, which is also the shortest amongst all tax-saving instruments.
- ELSS mutual funds do not have any kind of entry or exit load.
- With ELSS funds, you enjoy the dual benefits of tax-saving and capital appreciation from investments in equities.
- While investing in ELSS funds, you have the option to either opt for dividend pay-outs in case you wish to receive a regular income or go with the growth option for enjoying the benefit of capital appreciation.
- With good ELSS funds, you can enjoy high returns in the range of 10-12% in the long run.
How Do You Invest in ELSS Funds?
You can invest in ELSS funds the same way you invest in other mutual funds. The easiest way to do this is through an online investment services account. There are primarily two ways to invest in ELSS funds -
- Lump-sum
- SIP (systematic incident plan)
While in the former, you invest a large amount of money at one go, in the case of SIPs, a specific amount of money is invested in your chosen ELSS fund at periodic intervals. It is important to note that when you invest in ELSS funds via SIPs, each SIP is locked in for three years.
You can invest just INR 500 in an ELSS fund through the SIP route. Also, it is important to note that while you can claim tax benefit only up to INR 1.5 lakhs with ELSS funds, you are free to invest as much as you like.
When it comes to the redemption of your ELSS funds, it typically takes place on a first-in, first-out (FIFO) basis. It means the SIP that’s locked in first will be redeemed first, and so on.
Benefits of Investing in ELSS Funds
The key benefits of investing in ELSS mutual funds include-
- Portfolio diversification
Like exchange-traded funds (ETFs) and index funds, ELSS funds are top mutual funds that invest in a range of individual securities, such as stocks. This gives you the advantage of a diversified approach to investing as it decreases the risk.
- Low investment requirements
Like most mutual funds, you can start investing in ELSS funds with just INR 500. Since you do not have to wait to accumulate a huge sum before investing in ELSS funds, you can start taking advantage of market growth almost immediately.Tax deduction
Although several diversified equity fund options are available, ELSS funds are the only tax-saving mutual funds that offer excellent tax deduction benefits.
To Conclude
When investing in ELSS mutual funds, it is important to remember that since these are equity-linked funds, there is a certain level of risk involved with them. However, the SIP option allows you to invest systematically in easy and small installments that still give you the tax benefits without committing a lump sum at one go.
With PGIM India, you can easily invest in ELSS funds of your choice in a simple, quick, and hassle-free manner. All that you need to do is complete the KYC formalities and start investing as per your investment objective and risk tolerance.
