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In today’s times, investors are given numerous options to save their money. Now imagine, investing in a Mutual Fund that also provides tax benefits. Yes, it has been made possible with the introduction of ELSS Mutual Funds. This category primarily invests in those funds which offer multiple tax-saving options.
This article aims to provide readers with a detailed understanding of investing in ELSS schemes. It will cover all aspects related to these schemes, such as how they work, their benefits, and different ways of investing in them. By reading this post, investors will gain a thorough understanding of ELSS schemes and be better prepared to make informed investment decisions. To start with, we will explain the meaning of ELSS schemes and then look into other aspects of these investment options.
What is the ELSS Category?
ELSS Fund Schemes or Equity Linked Saving Schemes are a type of mutual fund that invests predominantly in equity and equity-related instruments. They are classified under the Multi-cap category because they invest in a diversified portfolio of large-cap, mid-cap, and small-cap stocks. ELSS Mutual Funds are unique as they come with a lock-in period of three years. It means investors cannot withdraw their investment before the end period. However, the advantage of investing in ELSS Mutual Funds is that they offer tax benefits under Section 80C of the Income Tax Act, making them an excellent option for saving on taxes.
How do ELSS Funds work?
After gaining an understanding of this category let us learn how it works. The following are some key aspects that will give an idea about its working theory:
- Special investment funds known as Equity Linked Savings Schemes (ELSS) mostly invest in equities of different companies.
- These companies are listed on the stock market.
- These funds choose equities from large, mid-sized, and small businesses in various industries.
- Encouraging the long-term growth of the invested capital is ELSS’s primary goal.
- The main goal is to maximize profits while lowering risk in investing.
- The fund manager, overseeing the fund, carefully selects equities after performing in-depth market research
Tax Benefits of Investing in ELSS Funds
The only type of mutual fund that offers a tax benefit is the ELSS Mutual Funds. Let’s examine the ELSS tax benefits in more detail:
- Investments made in Equity Linked Savings Plans are tax deductible under Section 80C of the Income Tax Regulations.
- By investing in an Equity Linked Savings Scheme, investors can save up to RS. 46,800 in taxes and claim a deduction of up to RS. 1.5 lakh.
- Redemption of ELSS funds before the three-year lock-in period is not allowed.
- A 10% long-term capital gains tax will be applicable when ELSS funds are redeemed. However, no tax is applicable if the gain is less than RS 1 lakh.
How to invest in ELSS Funds?
Investing in Mutual Funds has been made very simple for the investors. Let us learn about the three investment options available:
Growth Option
Regular dividend payments are not made if the growth option is selected. Rather, gains are realized only when the investment is redeemed; they do not occur immediately. It is important to understand that while this strategy increases the investment’s total value, there is a chance that the market will fluctuate.
Dividend Option
In this option, investors receive regular payouts referred to as dividends. Understanding that these dividends may be taxable depending on the investor’s income level is essential. Additionally, a 10% tax is withheld at source (TDS) if dividends exceed RS 5,000.
Option for Dividend Reinvestment
Under this option, investors reinvest their dividends, increasing the Net Asset Value (NAV). It is useful when the market is rising and a positive trend is expected to remain. It is similar to using dividends to purchase additional investment units, possibly increasing returns over time.
Things to consider before investing in the ELSS category
Certain factors should be well-thought before making an investment decision. Here are some basic points to be kept in mind:
Fund returns
Before choosing a fund, its performance should be compared with competitors and the benchmark to determine if it has consistently outperformed them in the past. While no fund can always be at the top, good funds tend to remain in the top quartiles for extended periods.
Fund house history
Fund houses with a track record of solid performance over a long period usually five to ten years should be chosen.
Expense ratio
The ratio shows how much money goes into fund management. Investing in funds with reduced expense ratios can increase return on investment.
Financial parameters
Several criteria can be taken into account to evaluate a fund’s performance, including beta, alpha, standard deviation, and Sharpe ratio. Larger Sharpe ratio funds are preferred, but larger standard deviation and beta funds are riskier.
Fund manager
The primary role of the fund manager is to oversee the funds. Proficiency and expertise in identifying quality companies and constructing a strong portfolio are key qualities.
SIP vs. lumpsum
The decision between SIP and lumpsum should be considered when investing in ELSS. A fixed amount gets invested regularly under SIP, usually monthly. Lumpsum, on the other hand, involves investing a large sum all at once. Due to its cost-averaging feature, which provides more units during down markets and less during rising ones. SIP mode is typically seen as the best choice. Lump sum investments, however, might also be chosen if there is extra cash.
In a nutshell, it’s important to assess a fund’s performance, track record, expense ratio, manager and various above-mentioned aspects. It will help investors in making the right investment choice.
Conclusion
In conclusion, we learned that ELSS Mutual Funds is the best tax-saving fund scheme for investors. It has offered many benefits for the investing party. While reading this article, it is understood that many aspects such as the fund’s performance, manager, and expense ratio, should be understood. These are very important things to consider before starting one’s investment journey.
Investors have the option to invest in this category through an online Systematic Investment Plan (SIP), which offers a hassle-free and convenient investment process. With the help of an SIP, investors can easily invest in a disciplined manner at regular intervals. Thereby minimizing their market risk and maximizing their returns.
By carefully considering these crucial aspects, investors can ensure that they are making informed decisions when embarking on their investment journey.
