Equity Linked Savings Schemes (ELSS) are usually in demand at the end of a financial year as they offer maximum tax deduction 1.5 lakh under section 80C of the Income Tax Act.
Experts suggest that it is wise to start your investment in ELSS funds at the beginning of the financial year as it gives investors more time to evaluate the performance and suitability of the scheme. Let us see whether ELSS funds are just a good tax saving option or can it also help in wealth creation.
an ELSS is a shareOriented mutual fund, which allocates at least 65% to equity and the rest to debt instruments. ELSS Fund is the only mutual fund scheme that comes with tax deduction benefits.
A person in the highest income tax bracket of 30% can save up to 46,800 per annum by investing in taxes 1.5 Lakh in ELSS Mutual Fund.
Another factor that works in their favor is that ELSS schemes have the shortest lock-in period of only three years, but there is no compulsion for investors to exit these funds after this period.
Over the past five years, ELSS funds have given an average return of around 13.32% against NPS (National Pension System) returns similar to their equity funds, while safer tax-saving options like Public Provident Fund (PPF) are currently available. Offered 6-7% type of returns. However, NPS and PPF have a much longer lock-in period.
Rs. Investors should keep in mind their goals, risk appetite and time frame while choosing a tax saving product.
While ELSS funds have a lock-in period of three years, experts suggest investing in the fund for at least five years.
“The main reason is that equities are a very volatile asset class. The longer investors stay invested, the longer their money gets, and they can get optimum returns in equities,” Desai said.
Keep in mind that when invested at rich valuations, equity funds like ELSS may take longer to deliver decent returns.
Also, ideally, investors with already a well-diversified equity portfolio should have just one ELSS fund.
When it comes to 80C, apart from ELSS, the section also allows deduction for investments made in small savings schemes, payment of life insurance premium and principal amount of home loan.
Hence, it would be unwise for an investor to go for ELSS funds, if it has already been exhausted or not. 1.5 lakh limit under section 80C on other instruments.
While ELSS funds have given good returns in the recent past, investors should be careful in holding more than one ELSS fund in their portfolio.
What should investors do?
Remember that ELSS is an equity fund, hence, it is better to make systematic investments from time to time depending on the risk appetite and time frame. If an individual’s current portfolio is more inclined towards growth, one should choose value-oriented ELSS, and vice versa. Investors should also check the underlying portfolio to see if the ELSS fund is more skewed towards large, mid or small caps.
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