A variant of equity mutual funds, ELSS is the acronym for equity-linked savings schemes. ELSS is an open-ended mutual fund variant that invests approximately 80% of your corpus in stocks. These schemes can help you save taxes under Section 80C of the Income Tax Act. An ELSS mutual fund has a lock-in period of three years, regarded as the shortest lock-in period under Section 80C investments.
Here are the steps you must follow if you want to invest in these funds in India:
1. Selecting ELSS:
First, select the tax-saving mutual fund. Before choosing the scheme, thoroughly research the returns offered by different ELSS schemes available in the market.
2. Determine the investment amount:
This step is imperative whether ELSS or any other type of mutual fund investment. For this, you can use a free online mutual fund calculator. These calculators are accessible and easy to use.
An asset management company or AMC offers mutual funds both online and offline. After choosing an AMC, decide whether you are purchasing the ELSS scheme offline or online.
Why invest in ELSS?
Now that you know the steps to invest in ELSS, let’s look at the reasons you must invest in these equity funds:
ELSS mutual funds are also called tax-saving funds. ELSS investments are eligible for tax deductions of up to ₹1,50,000. This benefit is applicable under Section 80C of the Income Tax Act, 1961.
Like most mutual fund schemes, there are two investment modes for investing in ELSS. The two modes are the lump sum and systematic investment plans or SIPs. Under the lump sum mode, you pay the investment amount at once. SIPs work differently. Under this mode, you can invest in your ELSS fund monthly. Moreover, under SIP, you can start with a low investment amount.
ELSS primarily invest in equity-oriented instruments. Therefore, you can enjoy high returns if the equity market is performing well.
Like other mutual funds, ELSS invests across different sectors and market capitalisation. This action is called diversification. Diversification can cushion your mutual fund portfolio against market volatility. So, if a particular asset class is underperforming, the other well-performing asset classes will fetch your portfolio high returns. These funds invest across different market capitalisations and sectors. This action diversifies your mutual fund investment portfolio.
Dividend and growth:
These schemes provide two investment options, namely, growth fund and dividend fund. Under a growth fund, you pay the investors a lump sum after the lock-in period. The dividend option, on the other hand, works differently. You pay a fixed amount to the investors in instalments during the lock-in period of 3 years.
Apart from tax-free gains, ELSS offer high liquidity and transparency. They have a lock-in period of three years, after which you can withdraw your investment whenever you want. It is also prudent if you don’t redeem your ELSS fund investment.