Equity Linked Savings Scheme (ELSS) is a popular mutual fund category in India that allows investors to save tax and also potentially earn high returns by investing in equities.
ELSS has gained popularity in recent years as it offers a unique combination of tax-saving benefits and market-linked returns.
What is ELSS?
ELSS is a type of mutual fund that invests primarily in equity and equity-related instruments. These funds are designed to offer tax-saving benefits under Section 80C of the Income Tax Act, 1961, up to a maximum limit of ₹1.5 lakhs per financial year.
ELSS has a lock-in period of three years, which means investors cannot redeem their investment before three years. However, this lock-in period is one of the shortest among all tax-saving investment options available in India. Also, ELSS has the potential to offer higher returns as it invests primarily in equities, which have the potential to deliver higher returns over the long term.
Benefits of investing in ELSS
There are several reasons why ELSS can be a suitable investment option for investors looking to save taxes and earn potentially high returns:
- Tax-saving benefits: ELSS offers tax-saving benefits under Section 80C of the Income Tax Act, 1961. Investors can claim a deduction of up to ₹1.5 lakhs per financial year by investing in ELSS.
- Potential for higher returns: ELSS invests primarily in equities, which have the potential to deliver higher returns over the long term. While equity investments come with higher risks, they can also offer potentially higher returns than other asset classes like fixed deposits or debt funds.
- Short lock-in period: ELSS has a lock-in period of three years, which is relatively short compared to other tax-saving investment options like National Savings Certificate (NSC) or Public Provident Fund (PPF), which have lock-in periods of five or fifteen years, respectively.
- Systematic investment option: ELSS allows investors to invest systematically through Systematic Investment Plans (SIPs), which can help them inculcate a disciplined investment habit and reduce the impact of market volatility on their investments.
- Professional management: ELSS is managed by experienced fund managers who have a deep understanding of the equity markets and can help investors create a well-diversified portfolio.
Risks associated with ELSS
While ELSS can offer potentially high returns, it also comes with risks associated with equity investments. Some of the risks associated with it are:
- Market risk: ELSS invests primarily in equities, which are subject to market risks. The value of the investment can fluctuate based on the performance of the equity markets.
- Liquidity risk: ELSS has a lock-in period of three years, which means investors cannot redeem their investment before the end of the lock-in period. This can lead to liquidity risks if investors require the funds urgently.
- Concentration risk: ELSS invests primarily in equities, which can lead to concentration risks if the fund is heavily invested in a particular sector or a few stocks.
Conclusion:
Equity Linked Savings Scheme is a popular tax-saving investment option in India that offers the potential for high returns. However, investors should be aware of the risks associated with equity investments and should invest based on their risk appetite and investment goals.
It is also recommended to diversify their investment portfolio by investing in a mix of equity and debt instruments. Investors should consult with their financial advisors before making any investment decision.
